G.R. No.

L-23145

November 29, 1968

TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D.

TAYAG, ancillary administrator-appellee,
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
1
Probate Division of this Court."
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
2
estate of the deceased. 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]
3
considered as lost."
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
4
Company, in New York, U.S.A...."
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 Philippines. Nor could it. Such a
power is inherent in his duty to settle her estate and satisfy the claims of local
5
creditors. 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
6
or country."
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
7
distributed among his heirs."
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.
8

Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue
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
9
deceased Idonah Slade Perkins, ..." 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
10
New York."
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
11
development."
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
12
offensive." Some of them have persisted even to the present, that eminent
jurist, noting "the quasi contract, the adopted child, the constructive trust, all of
13
flourishing vitality, to attest the empire of "as if" today." 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
14
brought it to the light."

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
15
await the "final decision by [a] court regarding the ownership [thereof]."
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 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 bylaws 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.

purely dependent on its will. As Berle so aptly stated: "Classically, a

corporation was conceived as an artificial person, owing its existence through
17
creation by a sovereign power." 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,
18
intangible, and existing only in contemplation of law."
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
19
extent of whose existence, powers and liberties is fixed by its charter." Dean
Pound's terse summary, a juristic person, resulting from an association of
20
human beings granted legal personality by the state, puts the matter neatly.
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
21
entity, independent of state recognition and concession." 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.
22

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
16
created by operation of law...." It owes its life to the state, its birth being

5. One last point. In Viloria v. Administrator of Veterans Affairs, 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
23
of the United States court."
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.
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.

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.
Makalintal, Zaldivar and Capistrano, JJ., concur.
Concepcion, C.J., Reyes, J.B.L., Dizon, Sanchez and Castro, JJ., concur in the
result.

and his shares of stock in other corporations in exchange for 225,972 Tormil
Realty shares. Hence, on various dates in July and August of 1984, ten (10)
deeds of assignment were executed by the late Judge Torres:
G.R. No. 120138

September 5, 1997

MANUEL A. TORRES, JR., (Deceased), GRACIANO J. TOBIAS, RODOLFO

L. JOCSON, JR., MELVIN S. JURISPRUDENCIA, AUGUSTUS CESAR
AZURA and EDGARDO D. PABALAN, petitioners,
vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION,
TORMIL REALTY & DEVELOPMENT CORPORATION, ANTONIO P.
TORRES, JR., MA. CRISTINA T. CARLOS, MA. LUISA T. MORALES and
DANTE D. MORALES, respondents.

ASSIGNMENT DATE PROPERTY ASSIGNED LOCATION SHARES

TO BE
ISSUED
1. July 13, 1984 TCT 81834 Quezon City 13,252
TCT 144240 Quezon City
2. July 13, 1984 TCT 77008 Manila
TCT 65689 Manila 78,493
TCT 109200 Manila

KAPUNAN, J.:

3. July 13, 1984 TCT 374079 Makati 8,307

In this petition for review on certiorari under Rule 45 of the Revised Rules of
Court, petitioners seek to annul the decision of the Court of Appeals in CAG.R. SP. No. 31748 dated 23 May 1994 and its subsequent resolution dated
10 May 1995 denying petitioners' motion for reconsideration.

4. July 24, 1984 TCT 41527 Pasay

TCT 41528 Pasay 9,855
TCT 41529 Pasay
5. Aug. 06, 1984 El Hogar Filipino Stocks 2,000

The present case involves two separate but interrelated conflicts. The facts
leading to the first controversy are as follows:
The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the majority
stockholder of Tormil Realty & Development Corporation while private
respondents who are the children of Judge Torres' deceased brother Antonio
A. Torres, constituted the minority stockholders. In particular, their respective
shareholdings and positions in the corporation were as follows:
Name of
Shares

Stockholder

Number

of

Percentage

Position(s)

Manuel A. Torres, Jr. 100,120 57.21 Dir./Pres./Chair

Milagros P. Torres 33,430 19.10 Dir./Treasurer
Josefina P. Torres 8,290 4.73 Dir./Ass. Cor-Sec.
Ma. Cristina T. Carlos 8,290 4.73 Dir./Cor-Sec.
Antonio P. Torres, Jr. 8,290 4.73 Director
Ma. Jacinta P. Torres 8,290 4.73 Director
Ma. Luisa T. Morales 7,790 4.45 Director
1
Dante D. Morales 500 .28 Director
In 1984, Judge Torres, in order to make substantial savings in taxes, adopted
an "estate planning" scheme under which he assigned to Tormil Realty &
Development Corporation (Tormil for brevity) various real properties he owned

6. Aug. 06, 1984 Manila Jockey Club Stocks 48,737

7. Aug. 07, 1984 San Miguel Corp. Stocks 50,283
8. Aug. 07, 1984 China banking Corp. Stocks 6,300
9. Aug. 20, 1984 Ayala Corp. Stocks 7,468
10. Aug. 29, 1984 Ayala Fund Stocks 1,322

2
225,972
Consequently, the aforelisted properties were duly recorded in the inventory of
assets of Tormil Realty and the revenues generated by the said properties
were correspondingly entered in the corporation's books of account and
financial records.
Likewise, all the assigned parcels of land were duly registered with the
respective Register of Deeds in the name of Tormil Realty, except for the ones
located in Makati and Pasay City.

At the time of the assignments and exchange, however, only 225,000 Tormil
Realty shares remained unsubscribed, all of which were duly issued to and
received by Judge Torres (as evidenced by stock certificates Nos. 17, 18, 19,
3
20, 21, 22, 23, 24 & 25).
Due to the insufficient number of shares of stock issued to Judge Torres and
the alleged refusal of private respondents to approve the needed increase in
the corporation's authorized capital stock (to cover the shortage of 972 shares
due to Judge Torres under the "estate planning" scheme), on 11 September
1986, Judge Torres revoked the two (2) deeds of assignment covering the
4
properties in Makati and Pasay City.
Noting the disappearance of the Makati and Pasay City properties from the
corporation's inventory of assets and financial records private respondents, on
31 March 1987, were constrained to file a complaint with the Securities and
Exchange Commission (SEC) docketed as SEC Case No. 3153 to compel
Judge Torres to deliver to Tormil corporation the two (2) deeds of assignment
covering the aforementioned Makati and Pasay City properties which he had
unilaterally revoked and to cause the registration of the corresponding titles in
the name of Tormil. Private respondents alleged that following the
disappearance of the properties from the corporation's inventory of assets, they
found that on October 24, 1986, Judge Torres, together with Edgardo Pabalan
and Graciano Tobias, then General Manager and legal counsel, respectively,
of Tormil, formed and organized a corporation named "Torres-Pabalan Realty
and Development Corporation" and that as part of Judge Torres' contribution to
the new corporation, he executed in its favor a Deed of Assignment conveying
the same Makati and Pasay City properties he had earlier transferred to Tormil.
The second controversy involving the same parties concerned the
election of the 1987 corporate board of directors.
The 1987 annual stockholders meeting and election of directors of Tormil
corporation was scheduled on 25 March 1987 in compliance with the
provisions of its by-laws.
Pursuant thereto, Judge Torres assigned from his own shares, one (l) share
each to petitioners Tobias, Jocson, Jurisprudencia, Azura and Pabalan. These
assigned shares were in the nature of "qualifying shares," for the sole purpose
of meeting the legal requirement to be able to elect them (Tobias and
company) to the Board of Directors as Torres' nominees.
The assigned shares were covered by corresponding Tormil Stock Certificates
Nos. 030, 029, 028, 027, 026 and at the back of each certificate the following
inscription is found:

The present certificate and/or the one share it represents,

conformably to the purpose and intention of the Deed of
Assignment dated March 6, 1987, is not held by me under any
claim of ownership and I acknowledge that I hold the same
merely as trustee of Judge Manuel A. Torres, Jr. and for the
sole purpose of qualifying me as Director;
(Signature of Assignee)

The reason behind the aforestated action was to remedy the "inequitable
lopsided set-up obtaining in the corporation, where, notwithstanding his
controlling interest in the corporation, the late Judge held only a single seat in
the nine-member Board of Directors and was, therefore, at the mercy of the
minority, a combination of any two (2) of whom would suffice to overrule the
6
majority stockholder in the Board's decision making functions."
On 25 March 1987, the annual stockholders meeting was held as scheduled.
What transpired therein was ably narrated by Attys. Benito Cataran and Bayani
De los Reyes, the official representatives dispatched by the SEC to observe
the proceedings (upon request of the late Judge Torres) in their report dated
27 March 1987:
xxx xxx xxx
The undersigned arrived at 1:55 p.m. in the place of the
meeting, a residential bungalow in Urdaneta Village, Makati,
Metro Manila. Upon arrival, Josefina Torres introduced us to
the stockholders namely: Milagros Torres, Antonio Torres, Jr.,
Ma. Luisa Morales, Ma. Cristina Carlos and Ma. Jacinta
Torres. Antonio Torres, Jr. questioned our authority and
personality to appear in the meeting claiming subject
corporation is a family and private firm. We explained that our
appearance there was merely in response to the request of
Manuel Torres, Jr. and that SEC has jurisdiction over all
registered corporations. Manuel Torres, Jr., a septuagenarian,
argued that as holder of the major and controlling shares, he
approved of our attendance in the meeting.
At about 2:30 p.m., a group composed of Edgardo Pabalan,
Atty. Graciano Tobias, Atty. Rodolfo Jocson, Jr., Atty. Melvin
Jurisprudencia, and Atty. Augustus Cesar Azura arrived. Atty.
Azura told the body that they came as counsels of Manuel
Torres, Jr. and as stockholders having assigned qualifying
shares by Manuel Torres, Jr.

The stockholders' meeting started at 2:45 p.m. with Mr.

Pabalan presiding after verbally authorized by Manuel Torres,
Jr., the President and Chairman of the Board. The secretary
when asked about the quorum, said that there was more than
a quorum. Mr. Pabalan distributed copies of the president's
report and the financial statements. Antonio Torres, Jr.
requested time to study the said reports and brought out the
question of auditing the finances of the corporation which he
claimed was approved previously by the board. Heated
arguments ensued which also touched on family matters.
Antonio Torres, Jr. moved for the suspension of the meeting
but Manuel Torres, Jr. voted for the continuation of the
proceedings.
Mr. Pabalan suggested that the opinion of the SEC
representatives be asked on the propriety of suspending the
meeting but Antonio Torres, Jr. objected reasoning out that we
were just observers.
When the Chairman called for the election of directors, the
Secretary refused to write down the names of nominees
prompting Atty. Azura to initiate the appointment of Atty.
Jocson, Jr. as Acting Secretary.
Antonio Torres, Jr. nominated the present members of the
Board. At this juncture, Milagros Torres cried out and told the
group of Manuel Torres, Jr. to leave the house.
Manuel Torres, Jr., together with his lawyers-stockholders
went to the residence of Ma. Jacinta Torres in San Miguel
Village, Makati, Metro Manila. The undersigned joined them
since the group with Manuel Torres, Jr. the one who requested
for S.E.C. observers, represented the majority of the
outstanding capital stock and still constituted a quorum.
At the resumption of the meeting, the following were
nominated and elected as directors for the year 1987-1988:
1. Manuel Torres, Jr.
2. Ma. Jacinta Torres
3. Edgardo Pabalan
4. Graciano Tobias

5. Rodolfo Jocson, Jr.

6. Melvin Jurisprudencia
7. Augustus Cesar Azura
8. Josefina Torres
9. Dante Morales
After the election, it was resolved that after the meeting, the
new board of directors shall convene for the election of
officers.
xxx xxx xxx

Consequently, on 10 April 1987, private respondents instituted a complaint with

the SEC (SEC Case No. 3161) praying in the main, that the election of
petitioners to the Board of Directors be annulled.
Private respondents alleged that the petitioners-nominees were not legitimate
stockholders of Tormil because the assignment of shares to them violated the
minority stockholders' right of pre-emption as provided in the corporation's
articles and by-laws.
Upon motion of petitioners, SEC Cases Nos. 3153 and 3161 were consolidated
for joint hearing and adjudication.
On 6 March 1991, the Panel of Hearing Officers of the SEC rendered a
decision in favor of private respondents. The dispositive portion thereof states,
thus:
WHEREFORE, premises considered, judgment is hereby
rendered as follows:
1. Ordering and directing the respondents, particularly
respondent Manuel A. Torres, Jr., to turn over and deliver to
TORMIL through its Corporate Secretary, Ma. Cristina T.
Carlos: (a) the originals of the Deeds of Assignment dated July
13 and 24, 1984 together with the owner's duplicates of
Transfer Certificates of Title Nos. 374079 of the Registry of
Deeds for Makati, and 41527, 41528 and 41529 of the
Registry of Deeds for Pasay City and/or to cause the formal
registration and transfer of title in and over such real properties
in favor of TORMIL with the proper government agency; (b) all

corporate books of account, records and papers as may be

necessary for the conduct of a comprehensive audit
examination, and to allow the examination and inspection of
such accounting books, papers and records by any or all of the
corporate directors, officers and stockholders and/or their duly
authorized representatives or auditors;

WHEREFORE, premises considered, the appealed decision of

the hearing panel is hereby affirmed and all motions pending
before us incident to this appealed case are necessarily
DISMISSED.

2. Declaring as permanent and final the writ of preliminary

injunction issued by the Hearing Panel on February 13, 1989;

Undaunted, on 10 August 1993, petitioners proceeded to plead its cause to the

Court of Appeals by way of a petition for review (docketed as CA-G.R. SP No.
31748).

3. Declaring as null and void the election and appointment of

respondents to the Board of Directors and executive positions
of TORMIL held on March 25, 1987, and all their acts and
resolutions made for and in behalf of TORMIL by authority of
and pursuant to such invalid appointment & election held on
March 25, 1987;
4. Ordering the respondents jointly and severally, to pay the
complainants the sum of ONE HUNDRED THOUSAND
8
PESOS (P100,000.00) as and by way of attorney's fees.
Petitioners promptly appealed to the SEC en banc (docketed as SEC-AC No.
339). Thereafter, on 3 April 1991, during the pendency of said appeal,
petitioner Manuel A. Torres, Jr. died. However, notice thereof was brought to
the attention of the SEC not by petitioners' counsel but by private respondents
9
in a Manifestation dated 24 April 1991.

SO ORDERED.

11

On 23 May 1994, the Court of Appeals rendered a decision, the dispositive

portion of which states:
WHEREFORE, the petition for review is DISMISSED and the
appealed decision is accordingly affirmed.
SO ORDERED.

12

From the said decision, petitioners filed a motion for reconsideration which was
13
denied in a resolution issued by the Court of Appeals dated 10 May 1995.
Insisting on their cause, petitioners filed the present petition for review alleging
that the Court of Appeals committed the following errors in its decision:
(1)

On 8 June 1993, petitioners filed a Motion to Suspend Proceedings on grounds

that no administrator or legal representative of the late Judge Torres' estate
has yet been appointed by the Regional Trial Court of Makati where Sp. Proc.
No. M-1768 ("In Matter of the Issuance of the Last Will and Testament of
Manuel A Torres, Jr.") was pending. Two similar motions for suspension were
filed by petitioners on 28 June 1993 and 9 July 1993.
On 19 July 1993, the SEC en banc issued an Order denying petitioners'
aforecited motions on the following ground:
Before the filing of these motions, the Commission en banc
had already completed all proceedings and had likewise ruled
on the merits of the appealed cases. Viewed in this light, we
thus feel that there is nothing left to be done except to deny
10
these motions to suspend proceedings.
On the same date, the SEC en banc rendered a decision, the dispositive
portion of which reads, thus:

WHEN IT RENDERED THE MAY 23, 1994 DECISION,

WHICH IS A FULL LENGTH DECISION, WITHOUT THE
EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. AC
NO. 339 BEING PROPERLY BROUGHT BEFORE IT FOR
REVIEW
AND
RE-EXAMINATION,
AN
OMISSION
RESULTING IN A CLEAR TRANSGRESSION OR
CURTAILMENT OF THE RIGHTS OF THE HEREIN
PETITIONERS TO PROCEDURAL DUE PROCESS;
(2)
WHEN IT SANCTIONED THE JULY 19, 1993 DECISION OF
THE RESPONDENT S.E.C., WHICH IS VOID FOR HAVING
BEEN
RENDERED
WITHOUT
THE
PROPER
SUBSTITUTION OF THE DECEASED PRINCIPAL PARTYRESPONDENT
IN
S.E.C.-AC
NO.
339
AND
CONSEQUENTLY, FOR WANT OF JURISDICTION OVER
THE SAID DECEASED'S TESTATE ESTATE, AND

MOREOVER, WHEN IT SOUGHT TO JUSTIFY THE NONSUBSTITUTION BY ITS APPLICATION OF THE CIVIL LAW
CONCEPT OF NEGOTIORUM GESTIO;
(3)
WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE
EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. AC
NO. 339 NOT HAVING ACTUALLY BEEN RE-EXAMINED,
THAT S.E.C. CASE NO. 3153 INVOLVED A SITUATION
WHERE
PERFORMANCE
WAS
IMPOSSIBLE
(AS
CONTEMPLATED UNDER ARTICLE 1191 OF THE CIVIL
CODE) AND WAS NOT A MERE CASE OF LESION OR
INADEQUACY OF CAUSE (UNDER ARTICLE 1355 OF THE
CIVIL CODE) AS SO ERRONEOUSLY CHARACTERIZED BY
THE RESPONDENT S.E.C.; and,
(4)
WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE
EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. AC
NO. 339 NOT HAVING ACTUALLY BEEN EXAMINED, THAT
THE RECORDING BY THE LATE JUDGE MANUEL A.
TORRES, JR. OF THE QUESTIONED ASSIGNMENT OF
QUALIFYING SHARES TO HIS NOMINEES, WAS
AFFIRMED IN THE STOCK AND TRANSFER BOOK BY AN
ACTING CORPORATE SECRETARY AND MOREOVER,
THAT ACTUAL NOTICE OF SAID ASSIGNMENT WAS
14
TIMELY MADE TO THE OTHER STOCKHOLDERS.
We shall resolve the issues in seriatim.
I
Petitioners insist that the failure to transmit the original records to the Court of
Appeals deprived them of procedural due process. Without the evidence and
the original records of the proceedings before the SEC, the Court of Appeals,
petitioners adamantly state, could not have possibly made a proper
appreciation and correct determination of the issues, particularly the factual
issues, they had raised on appeal. Petitioners also assert that since the Court
of Appeals allegedly gave due course to their petition, the original records
should have been forwarded to said court.
Petitioners anchor their argument on Secs. 8 and 11 of SC Circular 1-91 (dated
27 February 1991) which provides that:

8. WHEN PETITION GIVEN DUE COURSE. The Court of

Appeals shall give due course to the petition only when it
shows prima facie that the court, commission, board, office or
agency concerned has committed errors of fact or law that
would warrant reversal or modification of the order, ruling or
decision sought to be reviewed. The findings of fact of the
court commission, board, office or agency concerned when
supported by substantial evidence shall be final.
xxx xxx xxx
11. TRANSMITTAL OF RECORD. Within fifteen (15) days
from notice that the petition has been given due course, the
court, commission, board, office or agency concerned shall
transmit to the Court of Appeals the original or a certified copy
of the entire record of the proceeding under review. The record
to be transmitted may be abridged by agreement of all parties
to the proceeding. The Court of Appeals may require or permit
subsequent correction or addition to the record.
Petitioners contend that the Court of Appeals had given due course to their
petition as allegedly indicated by the following acts:
a) it granted the restraining order applied for
by the herein petitioners, and after hearing,
also the writ of preliminary injunction sought
by them; under the original SC Circular No. 191, a petition for review may be given due
course at the onset (paragraph 8) upon a
mere prima facie finding of errors of fact or law
having been committed, and such prima facie
finding is but consistent with the grant of the
extra-ordinary writ of preliminary injunction;
b) it required the parties to submit
"simultaneous memoranda" in its resolution
dated October 15, 1993 (this is in addition to
the comment required to be filed by the
respondents) and furthermore declared in the
same resolution that the petition will be
decided "on the merits," instead of outrightly
dismissing the same;
c) it rendered a full length decision, wherein:
(aa) it expressly declared the respondent
S.E.C. as having erred in denying the

pertinent motions to suspend proceedings;

(bb) it declared the supposed error as having
become a non-issue when the respondent
C.A. "proceeded to hear (the) appeal"; (cc) it
formulated and applied its own theory of
negotiorum gestio in justifying the nonsubstitution of the deceased principal party in
S.E.C. AC No. 339 and moreover, its
theory of di minimis non curat lex (this, without
first determining the true extent of and the
correct legal characterization of the so-called
"shortage"
of
Tormil
shares;
and, (dd) it expressly affirmed the assailed
15
decision of respondent S.E.C.
Petitioners' contention is unmeritorious.
There is nothing on record to show that the Court of Appeals gave due course
to the petition. The fact alone that the Court of Appeals issued a restraining
order and a writ of preliminary injunction and required the parties to submit
their respective memoranda does not indicate that the petition was given due
course. The office of an injunction is merely to preserve the status quo pending
the disposition of the case. The court can require the submission of
memoranda in support of the respective claims and positions of the parties
without necessarily giving due course to the petition. The matter of whether or
not to give due course to a petition lies in the discretion of the court.
It is worthy to mention that SC Circular No. 1-91 has been replaced by Revised
Administrative Circular No. 1-95 (which took effect on 1 June 1995) wherein
the procedure for appeals from quasi-judicial agencies to the Court of Appeals
was clarified thus:
10. Due course. If upon the filing of the comment or such
other pleadings or documents as may be required or allowed
by the Court of Appeals or upon the expiration of the period for
the filing thereof, and on the bases of the petition or the record
the Court of Appeals finds prima facie that the court or agency
concerned has committed errors of fact or law that would
warrant reversal or modification of the award, judgment, final
order or resolution sought to be reviewed, it may give due
course to the petition; otherwise, it shall dismiss the same. The
findings of fact of the court or agency concerned, when
supported by substantial evidence, shall be binding on the
Court of Appeals.
11. Transmittal of record. Within fifteen (15) days from
notice that the petition has been given due course, the Court of

Appeals may require the court or agency concerned to

transmit the original or a legible certified true copy of the entire
record of the proceeding under review. The record to be
transmitted may be abridged by agreement of all parties to the
proceeding. The Court of Appeals may require or permit
subsequent correction of or addition to the record. (Emphasis
ours.)
The aforecited circular now formalizes the correct practice and clearly states
that in resolving appeals from quasi judicial agencies, it is within the discretion
of the Court of Appeals to have the original records of the proceedings under
review be transmitted to it. In this connection petitioners' claim that the Court of
Appeals could not have decided the case on the merits without the records
being brought before it is patently lame. Indubitably, the Court of Appeals
decided the case on the basis of the uncontroverted facts and admissions
contained in the pleadings, that is, the petition, comment, reply, rejoinder,
memoranda, etc. filed by the parties.
II
Petitioners contend that the decisions of the SEC and the Court of Appeals are
null and void for being rendered without the necessary substitution of parties
(for the deceased petitioner Manuel A. Torres, Jr.) as mandated by Sec. 17,
Rule 3 of the Revised Rules of Court, which provides as follows:
Sec. 17. Death of party. After a party dies and the claim is
not thereby extinguished, the court shall order, upon proper
notice, the legal representative of the deceased to appear and
to be substituted for the deceased, within a period of thirty (30)
days, or within such time as may be granted. If the legal
representative fails to appear within said time, the court may
order the opposing party to procure the appointment of a legal
representative of the deceased within a time to be specified by
the court, and the representative shall immediately appear for
and on behalf of the interest of the deceased. The court
charges involved in procuring such appointment, if defrayed by
the opposing party, may be recovered as costs. The heirs of
the deceased may be allowed to be substituted for the
deceased, without requiring the appointment of an executor or
administrator and the court may appoint guardian ad litem for
the minor heirs.
Petitioners insist that the SEC en banc should have granted the motions to
suspend they filed based as they were on the ground that the Regional Trial
Court of Makati, where the probate of the late Judge Torres' will was pending,
had yet to appoint an administrator or legal representative of his estate.

We are not unaware of the principle underlying the aforequoted provision:

It has been held that when a party dies in an action that
survives, and no order is issued by the Court for the
appearance of the legal representative or of the heirs of the
deceased to be substituted for the deceased, and as a matter
of fact no such substitution has ever been effected, the trial
held by the court without such legal representative or heirs,
and the judgment rendered after such trial, are null and void
because the court acquired no jurisdiction over the persons of
the legal representative or of the heirs upon whom the trial and
16
the judgment are not binding.
As early as 8 April 1988, Judge Torres instituted Special Proceedings No. M1768 before the Regional Trial Court of Makati for the ante-mortem probate of
his holographic will which he had executed on 31 October 1986. Testifying in
the said proceedings, Judge Torres confirmed his appointment of petitioner
Edgardo D. Pabalan as the sole executor of his will and administrator of his
estate. The proceedings, however, were opposed by the same parties, herein
private respondents Antonio P. Torres, Jr., Ma. Luisa T. Morales and Ma.
17
Cristina T. Carlos,
who are nephew and nieces of Judge Torres, being the
children of his late brother Antonio A. Torres.
It can readily be observed therefore that the parties involved in the present
controversy are virtually the same parties fighting over the representation of
the late Judge Torres' estate. It should be recalled that the purpose behind the
rule on substitution of parties is the protection of the right of every party to due
process. It is to ensure that the deceased party would continue to be properly
represented in the suit through the duly appointed legal representative of his
estate. In the present case, this purpose has been substantially fulfilled
(despite the lack of formal substitution) in view of the peculiar fact that both
proceedings involve practically the same parties. Both parties have been
fiercely fighting in the probate proceedings of Judge Torres' holographic will for
appointment as legal representative of his estate. Since both parties claim
interests over the estate, the rights of the estate were expected to be fully
protected in the proceedings before the SEC en banc and the Court of
Appeals. In either case, whoever shall be appointed legal representative of
Judge Torres' estate (petitioner Pabalan or private respondents) would no
longer be a stranger to the present case, the said parties having voluntarily
submitted to the jurisdiction of the SEC and the Court of Appeals and having
thoroughly participated in the proceedings.
The foregoing rationate finds support in the recent case of Vda. de Salazar v.
18
CA, wherein the Court expounded thus:
The need for substitution of heirs is based on the right to due
process accruing to every party in any proceeding. The

rationale underlying this requirement in case a party dies

during the pendency of proceedings of a nature not
extinguished by such death, is that . . . the exercise of judicial
power to hear and determine a cause implicitly presupposes in
the trial court, amongst other essentials, jurisdiction over the
persons of the parties. That jurisdiction was inevitably impaired
upon the death of the protestee pending the proceedings
below such that unless and until a legal representative is for
him duly named and within the jurisdiction of the trial court, no
adjudication in the cause could have been accorded any
validity or binding effect upon any party, in representation of
the deceased, without trenching upon the fundamental right to
a day in court which is the very essence of the constitutionally
enshrined guarantee of due process.
We are not unaware of several cases where we have ruled
that a party having died in an action that survives, the trial held
by the court without appearance of the deceased's legal
representative or substitution of heirs and the judgment
rendered after such trial, are null and void because the court
acquired no jurisdiction over the persons of the legal
representatives or of the heirs upon whom the trial and the
judgment would be binding. This general rule notwithstanding,
in denying petitioner's motion for reconsideration, the Court of
Appeals correctly ruled that formal substitution of heirs is not
necessary when the heirs themselves voluntarily appeared,
participated in the case and presented evidence in defense of
deceased defendant. Attending the case at bench, after all, are
these particular circumstances which negate petitioner's
belated and seemingly ostensible claim of violation of her
rights to due process. We should not lose sight of the principle
underlying the general rule that formal substitution of heirs
must be effectuated for them to be bound by a subsequent
judgment. Such had been the general rule established not
because the rule on substitution of heirs and that on
appointment of a legal representative are jurisdictional
requirements per se but because non-compliance therewith
results in the undeniable violation of the right to due process of
those who, though not duly notified of the proceedings, are
substantially affected by the decision rendered therein . . . .
It is appropriate to mention here that when Judge Torres died on April 3, 1991,
the SEC en banc had already fully heard the parties and what remained was
the evaluation of the evidence and rendition of the judgment.
Further, petitioners filed their motions to suspend proceedings only after more
than two (2) years from the death of Judge Torres. Petitioners' counsel was

19

even remiss in his duty under Sec. 16, Rule 3 of the Revised Rules of Court.
Instead, it was private respondents who informed the SEC of Judge Torres'
death through a manifestation dated 24 April 1991.
For the SEC en banc to have suspended the proceedings to await the
appointment of the legal representative by the estate was impractical and
would have caused undue delay in the proceedings and a denial of justice.
There is no telling when the probate court will decide the issue, which may still
be appealed to the higher courts.
In any case, there has been no final disposition of the properties of the late
Judge Torres before the SEC. On the contrary, the decision of the SEC en
banc as affirmed by the Court of Appeals served to protect and preserve his
estate. Consequently, the rule that when a party dies, he should be substituted
by his legal representative to protect the interests of his estate in observance
of due process was not violated in this case in view of its peculiar situation
where the estate was fully protected by the presence of the parties who claim
interests therein either as directors, stockholders or heirs.
Finally, we agree with petitioners' contention that the principle of negotiorum
20
gestio
does not apply in the present case. Said principle explicitly covers
abandoned or neglected property or business.
III
Petitioners find legal basis for Judge Torres' act of revoking the assignment of
his properties in Makati and Pasay City to Tormil corporation by relying on Art.
1191 of the Civil Code which provides that:
Art. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third
persons who have acquired the thing, in accordance with
articles 1385 and 1388 and the Mortgage Law.

Petitioners' contentions cannot be sustained. We see no justifiable reason to

disturb the findings of SEC, as affirmed by the Court of Appeals:
We sustain the ruling of respondent SEC in the decision
appealed from (Rollo, pp. 45-46) that
. . . the shortage of 972 shares would not be
valid ground for respondent Torres to
unilaterally revoke the deeds of assignment he
had executed on July 13, 1984 and July 24,
1984 wherein he voluntarily assigned to
TORMIL real properties covered by TCT No.
374079 (Makati) and TCT No. 41527, 41528
and 41529 (Pasay) respectively.
A comparison of the number of shares that
respondent Torres received from TORMIL by
virtue of the "deeds of assignment" and the
stock certificates issued by the latter to the
former readily shows that TORMIL had
substantially performed what was expected of
it. In fact, the first two issuances were in
satisfaction to the properties being revoked by
respondent Torres. Hence, the shortage of
972 shares would never be a valid ground for
the revocation of the deeds covering Pasay
and Quezon City properties.
In Universal Food Corp. vs. CA, the Supreme
Court held:
The general rule is that
rescission of a contract will
not be permitted for a slight or
carnal breach, but only for
such
substantial
and
fundamental breach as would
defeat the very object of the
parties
in
making
the
agreement.
The shortage of 972 shares definitely is not
substantial and fundamental breach as would
defeat the very object of the parties in entering
into contract. Art. 1355 of the Civil Code also
provides: "Except in cases specified by law,

lesion or inadequacy of cause shall not

invalidate a contract, unless there has been
fraud, mistake or undue influences." There
being no fraud, mistake or undue influence
exerted on respondent Torres by TORMIL and
the latter having already issued to the former
of its 225,000 unissued shares, the most
logical course of action is to declare as null
and void the deed of revocation executed by
21
respondent Torres. (Rollo, pp. 45-46.)
The aforequoted Civil Code provision does not apply in this particular situation
for the obvious reason that a specific number of shares of stock (as evidenced
by stock certificates) had already been issued to the late Judge Torres in
exchange for his Makati and Pasay City properties. The records thus disclose:
DATE OF PROPERTY LOCATION NO. OF SHARES ORDER OF
ASSIGNMENT ASSIGNED TO BE ISSUED COMPLIANCE*
1. July 13, 1984 TCT 81834 Quezon City) 13,252 3rd
TCT 144240 Quezon City)
2. July 13, 1984 TCT 77008 Manila)
TCT 65689 Manila) 78,493 2nd
TCT 102200 Manila)

TOTAL 225,972.3
*Order of stock certificate issuances by TORMIL to respondent
Torres relative to the Deeds of Assignment he executed
22
sometime in July and August, 1984. (Emphasis ours.)
Moreover, we agree with the contention of the Solicitor General that the
shortage of shares should not have affected the assignment of the Makati and
Pasay City properties which were executed in 13 and 24 July 1984 and the
consideration for which have been duly paid or fulfilled but should have been
applied logically to the last assignment of property Judge Torres' Ayala
23
Fund shares which was executed on 29 August 1984.
IV
Petitioners insist that the assignment of "qualifying shares" to the nominees of
the late Judge Torres (herein petitioners) does not partake of the real nature of
a transfer or conveyance of shares of stock as would call for the "imposition of
stringent requirements (with respect to the) recording of the transfer of said
shares." Anyway, petitioners add, there was substantial compliance with the
above-stated requirement since said assignments were entered by the late
Judge Torres himself in the corporation's stock and transfer book on 6 March
1987, prior to the 25 March 1987 annual stockholders meeting and which
entries were confirmed on 8 March 1987 by petitioner Azura who was
appointed Assistant Corporate Secretary by Judge Torres.

3. July 13, 1984 TCT 374079 Makati 8,307 1st

Petitioners further argue that:
4. July 24, 1984 TCT 41527 Pasay
TCT 41528 Pasay) 9,855 4th
TCT 41529 Pasay)
5. August 6, 1984 El Hogar Filipino Stocks 2,000 7th
6. August 6, 1984 Manila Jockey Club Stocks 48,737 5th
7. August 7, 1984 San Miguel Corp. Stocks 50,238 8th

10.10. Certainly, there is no legal or just basis for the

respondent S.E.C. to penalize the late Judge Torres by
invalidating the questioned entries in the stock and transfer
book, simply because he initially made those entries (they
were later affirmed by an acting corporate secretary) and
because the stock and transfer book was in his possession
instead of the elected corporate secretary, if the background
facts herein-before narrated and the serious animosities that
then reigned between the deceased Judge and his relatives
are to be taken into account;

8. August 7, 1984 China Banking Corp. Stocks 6,300 6th

xxx xxx xxx
9. August 20, 1984 Ayala Corp. Stocks 7,468.2) 9th
10. August 29, 1984 Ayala Fund Stocks 1,322.1)

10.12. Indeed it was a practice in the corporate respondent, a

family corporation with only a measly number of stockholders,
for the late judge to have personal custody of corporate
records; as president, chairman and majority stockholder, he

had the prerogative of designating an acting corporate

secretary or to himself make the needed entries, in instances
where the regular secretary, who is a mere subordinate, is
unavailable or intentionally defaults, which was the situation
that obtained immediately prior to the 1987 annual
stockholders meeting of Tormil, as the late Judge Torres had
so indicated in the stock and transfer book in the form of the
entries now in question;

Carlos, the corporate secretary but by

respondent Torres, the President and
Chairman of the Board of Directors of
TORMIL. In contravention to the above cited
provision, the stock and transfer book was not
kept at the principal office of the corporation
either but at the place of respondent Torres.
These being the obtaining circumstances, any
entries made in the stock and transfer book on
March 8, 1987 by respondent Torres of an
alleged transfer of nominal shares to Pabalan
and Co. cannot therefore be given any valid
effect. Where the entries made are not valid,
Pabalan and Co. cannot therefore be
considered stockholders of record of TORMIL.
Because they are not stockholders, they
cannot therefore be elected as directors of
TORMIL. To rule otherwise would not only
encourage violation of clear mandate of Sec.
74 of the Corporation Code that stock and
transfer book shall be kept in the principal
office of the corporation but would likewise
open the flood gates of confusion in the
corporation as to who has the proper custody
of the stock and transfer book and who are the
real stockholders of records of a certain
corporation as any holder of the stock and
transfer book, though not the corporate
secretary, at pleasure would make entries
therein.

10.13. Surely, it would have been futile nay foolish for him to
have insisted under those circumstances, for the regular
secretary, who was then part of a group ranged against him, to
make the entries of the assignments in favor of his nominees;
24

Petitioners' contentions lack merit.

It is precisely the brewing family discord between Judge Torres and private
respondents his nephew and nieces that should have placed Judge Torres
on his guard. He should have been more careful in ensuring that his actions
(particularly the assignment of qualifying shares to his nominees) comply with
the requirements of the law. Petitioners cannot use the flimsy excuse that it
would have been a vain attempt to force the incumbent corporate secretary to
register the aforestated assignments in the stock and transfer book because
the latter belonged to the opposite faction. It is the corporate secretary's duty
and obligation to register valid transfers of stocks and if said corporate officer
refuses to comply, the transferor-stockholder may rightfully bring suit to compel
25
performance.
In other words, there are remedies within the law that
petitioners could have availed of, instead of taking the law in their own hands,
as the cliche goes.
Thus, we agree with the ruling of the SEC en banc as affirmed by the Court of
Appeals:

The fact that respondent Torres holds 81.28%

of the outstanding capital stock of TORMIL is
of no moment and is not a license for him to
arrogate unto himself a duty lodged to (sic) the
26
corporate secretary.

We likewise sustain respondent SEC when it ruled, interpreting

Section 74 of the Corporation Code, as follows (Rollo, p. 45):
In the absence of (any) provision to the
contrary, the corporate secretary is the
custodian of corporate records. Corollarily, he
keeps the stock and transfer book and makes
proper and necessary entries therein.
Contrary to the generally accepted corporate
practice, the stock and transfer book of
TORMIL was not kept by Ms. Maria Cristina T.

All corporations, big or small, must abide by the provisions of the Corporation
Code. Being a simple family corporation is not an exemption. Such
corporations cannot have rules and practices other than those established by
law.
WHEREFORE, premises considered, the petition for review on certiorari is
hereby DENIED.
SO ORDERED.

Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.

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.

G.R. No. 125469

October 27, 1997

PHILIPPINE STOCK EXCHANGE, INC., petitioner,

vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE
COMMISSION and PUERTO AZUL LAND, INC., respondents.
TORRES, JR., J.:
The Securities and Exchange Commission is the government agency, under
1
the direct general supervision of the Office of the President, 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
2
government to operate in the Philippines.
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.

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 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.
The appellate court had ruled that the SEC had both jurisdiction and authority
3
to look into the decision of the petitioner PSE, pursuant to Section 3 of the
4
Revised Securities Act in relation to Section 6(j) and 6(m) of P.D. No. 902-A,
5
and Section 38(b) 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 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
6
stock exchanges.
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
7
stock exchange or to ensure the fair administration of such exchange. 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
8
activities for the promotion of economic development.
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
9
the sale and disposition of securities in the country. 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
10
otherwise vested in some other government office.
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
11
perquisites appropriate to such a body. As to its corporate and management
decisions, therefore, the state will generally not interfere with the same.
Questions of policy and of management are left to the honest decision of the
officers and directors of a corporation, and the courts are without authority to
substitute their judgment for the judgment of the board of directors. The board
is the business manager of the corporation, and so long as it acts in good faith,
12
its orders are not reviewable by the courts.

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
13
judgment is attended by bad faith. In Board of Liquidators vs. Kalaw, 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,
14
or false promises, and the imposition of worthless ventures.
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 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
15
its securities.
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
16
must satisfy.
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;

(iii) has failed to comply with any of the

applicable requirements and conditions that
the Commission may, in the public interest
and for the protection of investors, impose
before the security can be registered;
(iv) has been engaged or is engaged or is
about to engage in fraudulent transaction;
(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;

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.
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.
SO ORDERED.
Regalado and Puno, JJ., concur.

(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
(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

Mendoza, J., concurs in the result.

CARPIO, J.:
The Case
1

This is a petition for certiorari to annul the Commission on Audits ("COA")

Resolution dated 3 January 2000 and the Decision dated 30 January 2001
denying the Motion for Reconsideration. The COA denied petitioner Ranulfo C.
Felicianos request for COA to cease all audit services, and to stop charging
auditing fees, to Leyte Metropolitan Water District ("LMWD"). The COA also
denied petitioners request for COA to refund all auditing fees previously paid
by LMWD.
Antecedent Facts
A Special Audit Team from COA Regional Office No. VIII audited the accounts
of LMWD. Subsequently, LMWD received a letter from COA dated 19 July
1999 requesting payment of auditing fees. As General Manager of LMWD,
petitioner sent a reply dated 12 October 1999 informing COAs Regional
Director that the water district could not pay the auditing fees. Petitioner cited
as basis for his action Sections 6 and 20 of Presidential Decree 198 ("PD
2
198") , as well as Section 18 of Republic Act No. 6758 ("RA 6758"). The
Regional Director referred petitioners reply to the COA Chairman on 18
October 1999.
On 19 October 1999, petitioner wrote COA through the Regional Director
asking for refund of all auditing fees LMWD previously paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D. Gangans
Resolution dated 3 January 2000 denying his requests. Petitioner filed a
motion for reconsideration on 31 March 2000, which COA denied on 30
January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to the petition
were resolutions of the Visayas Association of Water Districts (VAWD) and the
Philippine Association of Water Districts (PAWD) supporting the petition.
G.R. No. 147402

January 14, 2004

The Ruling of the Commission on Audit

ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of

the Leyte Metropolitan Water District (LMWD), Tacloban City, petitioner,
vs.
COMMISSION ON AUDIT, Chairman CELSO D. GANGAN, Commissioners
RAUL C. FLORES and EMMANUEL M. DALMAN, and Regional Director of
COA Region VIII, respondents.
DECISION

The COA ruled that this Court has already settled COAs audit jurisdiction over
local water districts in Davao City Water District v. Civil Service
3
Commission and Commission on Audit, as follows:
The above-quoted provision [referring to Section 3(b) PD 198]
definitely sets to naught petitioners contention that they are private
corporations. It is clear therefrom that the power to appoint the
members who will comprise the members of the Board of Directors

belong to the local executives of the local subdivision unit where such
districts are located. In contrast, the members of the Board of Directors
or the trustees of a private corporation are elected from among
members or stockholders thereof. It would not be amiss at this point to
emphasize that a private corporation is created for the private purpose,
benefit, aim and end of its members or stockholders. Necessarily, said
members or stockholders should be given a free hand to choose who
will compose the governing body of their corporation. But this is not the
case here and this clearly indicates that petitioners are not private
corporations.
The COA also denied petitioners request for COA to stop charging auditing
fees as well as petitioners request for COA to refund all auditing fees already
paid.
The Issues
Petitioner contends that COA committed grave abuse of discretion amounting
to lack or excess of jurisdiction by auditing LMWD and requiring it to pay
auditing fees. Petitioner raises the following issues for resolution:
1. Whether a Local Water District ("LWD") created under PD 198, as
amended, is a government-owned or controlled corporation subject to
the audit jurisdiction of COA;
2. Whether Section 20 of PD 198, as amended, prohibits COAs
certified public accountants from auditing local water districts; and
3. Whether Section 18 of RA 6758 prohibits the COA from charging
government-owned and controlled corporations auditing fees.

government-owned and controlled corporations with original

charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy
under this Constitution; (b) autonomous state colleges and universities;
(c) other government-owned or controlled corporations and their
subsidiaries; and (d) such non-governmental entities receiving subsidy
or equity, directly or indirectly, from or through the government, which
are required by law or the granting institution to submit to such audit as
a condition of subsidy or equity. However, where the internal control
system of the audited agencies is inadequate, the Commission may
adopt such measures, including temporary or special pre-audit, as are
necessary and appropriate to correct the deficiencies. It shall keep the
general accounts of the Government and, for such period as may be
provided by law, preserve the vouchers and other supporting papers
pertaining thereto. (Emphasis supplied)
The COAs audit jurisdiction extends not only to government "agencies or
instrumentalities," but also to "government-owned and controlled corporations
with original charters" as well as "other government-owned or controlled
corporations" without original charters.
Whether LWDs are Private or Government-Owned
and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a reexamination of a doctrine backed by a long line of cases culminating in Davao
5
City Water District v. Civil Service Commission and just recently reiterated
6
in De Jesus v. Commission on Audit. Petitioner maintains that LWDs are
not government-owned and controlled corporations with original charters.
Petitioner even argues that LWDs are private corporations. Petitioner asks the
Court to consider certain interpretations of the applicable laws, which would
7
give a "new perspective to the issue of the true character of water districts."

The Ruling of the Court

The petition lacks merit.
4

The Constitution and existing laws mandate COA to audit all government
agencies, including government-owned and controlled corporations ("GOCCs")
with original charters. An LWD is a GOCC with an original charter. Section
2(1), Article IX-D of the Constitution provides for COAs audit jurisdiction, as
follows:
SECTION 2. (1) The Commission on Audit shall have the power,
authority and duty to examine, audit, and settle all accounts pertaining
to the revenue and receipts of, and expenditures or uses of funds and
property, owned or held in trust by, or pertaining to, the Government,
or any of its subdivisions, agencies, or instrumentalities, including

Petitioner theorizes that what PD 198 created was the Local Waters Utilities
Administration ("LWUA") and not the LWDs. Petitioner claims that LWDs are
created "pursuant to" and not created directly by PD 198. Thus, petitioner
concludes that PD 198 is not an "original charter" that would place LWDs
within the audit jurisdiction of COA as defined in Section 2(1), Article IX-D of
the Constitution. Petitioner elaborates that PD 198 does not create LWDs since
it does not expressly direct the creation of such entities, but only provides for
8
their formation on an optional or voluntary basis. Petitioner adds that the
operative act that creates an LWD is the approval of the Sanggunian
Resolution as specified in PD 198.
Petitioners contention deserves scant consideration.

We begin by explaining the general framework under the fundamental law. The
Constitution recognizes two classes of corporations. The first refers to private
corporations created under a general law. The second refers to governmentowned or controlled corporations created by special charters. Section 16,
Article XII of the Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Governmentowned or controlled corporations may be created or established by special
charters in the interest of the common good and subject to the test of economic
viability.
The Constitution emphatically prohibits the creation of private corporations
9
except by a general law applicable to all citizens. The purpose of this
constitutional provision is to ban private corporations created by special
charters, which historically gave certain individuals, families or groups special
10
privileges denied to other citizens.
In short, Congress cannot enact a law creating a private corporation with a
special charter. Such legislation would be unconstitutional. Private corporations
may exist only under a general law. If the corporation is private, it must
necessarily exist under a general law. Stated differently, only corporations
created under a general law can qualify as private corporations. Under existing
11
laws, that general law is the Corporation Code, except that the Cooperative
12
Code governs the incorporation of cooperatives.
The Constitution authorizes Congress to create government-owned or
controlled corporations through special charters. Since private corporations
cannot have special charters, it follows that Congress can create corporations
with special charters only if such corporations are government-owned or
controlled.
Obviously, LWDs are not private corporations because they are not created
under the Corporation Code. LWDs are not registered with the Securities and
Exchange Commission. Section 14 of the Corporation Code states that "[A]ll
corporations organized under this code shall file with the Securities and
Exchange Commission articles of incorporation x x x." LWDs have no articles
of incorporation, no incorporators and no stockholders or members. There are
no stockholders or members to elect the board directors of LWDs as in the
case of all corporations registered with the Securities and Exchange
Commission. The local mayor or the provincial governor appoints the directors
of LWDs for a fixed term of office. This Court has ruled that LWDs are not
created under the Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been
excluded from the coverage of the CSC are those corporations created

pursuant to the Corporation Code. Significantly, petitioners are not

created under the said code, but on the contrary, they were
created pursuant to a special law and are governed primarily by
13
its provision. (Emphasis supplied)
LWDs exist by virtue of PD 198, which constitutes their special charter. Since
under the Constitution only government-owned or controlled corporations may
have special charters, LWDs can validly exist only if they are governmentowned or controlled. To claim that LWDs are private corporations with a
special charter is to admit that their existence is constitutionally infirm.
Unlike private corporations, which derive their legal existence and power from
the Corporation Code, LWDs derive their legal existence and power from PD
14
198. Sections 6 and 25 of PD 198 provide:
Section 6. Formation of District. This Act is the source of
authorization and power to form and maintain a district. For
purposes of this Act, a district shall be considered as a quasipublic corporation performing public service and supplying
public wants. As such, a district shall exercise the powers, rights
and privileges given to private corporations under existing laws,
in addition to the powers granted in, and subject to such
restrictions imposed, under this Act.
(a) The name of the local water district, which shall include the name
of the city, municipality, or province, or region thereof, served by said
system, followed by the words "Water District".
(b) A description of the boundary of the district. In the case of a city or
municipality, such boundary may include all lands within the city or
municipality. A district may include one or more municipalities, cities or
provinces, or portions thereof.
(c) A statement completely transferring any and all waterworks and/or
sewerage facilities managed, operated by or under the control of such
city, municipality or province to such district upon the filing of resolution
forming the district.
(d) A statement identifying the purpose for which the district is formed,
which shall include those purposes outlined in Section 5 above.
(e) The names of the initial directors of the district with the date of
expiration of term of office for each.
(f) A statement that the district may only be dissolved on the grounds
and under the conditions set forth in Section 44 of this Title.

(g) A statement acknowledging the powers, rights and obligations as

set forth in Section 36 of this Title.

of these chartered agencies such as the Philippine Airlines, Manila

Hotel and Hyatt are excluded from the coverage of the civil service.

Nothing in the resolution of formation shall state or infer that the local
legislative body has the power to dissolve, alter or affect the district
beyond that specifically provided for in this Act.

THE PRESIDING OFFICER (Mr. Trenas). What does the Committee

say?

If two or more cities, municipalities or provinces, or any combination

thereof, desire to form a single district, a similar resolution shall be
adopted in each city, municipality and province.

MR. FOZ. Just one question, Mr. Presiding Officer. By the term
"original charters," what exactly do we mean?
MR. ROMULO. We mean that they were created by law, by an act
of Congress, or by special law.

xxx
MR. FOZ. And not under the general corporation law.
Sec. 25. Authorization. The district may exercise all the powers
which are expressly granted by this Title or which are necessarily
implied from or incidental to the powers and purposes herein
stated. For the purpose of carrying out the objectives of this Act, a
district is hereby granted the power of eminent domain, the exercise
thereof shall, however, be subject to review by the Administration.
(Emphasis supplied)
Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly
confers on LWDs corporate powers. Section 6 of PD 198 provides that
LWDs "shall exercise the powers, rights and privileges given to private
corporations under existing laws." Without PD 198, LWDs would have no
corporate powers. Thus, PD 198 constitutes the special enabling charter of
LWDs. The ineluctable conclusion is that LWDs are government-owned and
controlled corporations with a special charter.
The phrase "government-owned and controlled corporations with original
charters" means GOCCs created under special laws and not under the general
incorporation law. There is no difference between the term "original charters"
and "special charters." The Court clarified this in National Service
15
Corporation v. NLRC by citing the deliberations in the Constitutional
Commission, as follows:
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.
Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending my original
proposed amendment to now read as follows: "including governmentowned or controlled corporations WITH ORIGINAL CHARTERS." The
purpose of this amendment is to indicate that government corporations
such as the GSIS and SSS, which have original charters, fall within the
ambit of the civil service. However, corporations which are subsidiaries

MR. ROMULO. That is correct. Mr. Presiding Officer.

MR. FOZ. With that understanding and clarification, the Committee
accepts the amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the
general corporation law are out.
MR. ROMULO. That is correct. (Emphasis supplied)
16

Again, in Davao City Water District v. Civil Service Commission, the

Court reiterated the meaning of the phrase "government-owned and controlled
corporations with original charters" in this wise:
By "government-owned or controlled corporation with original
charter," We mean government owned or controlled corporation
created by a special law and not under the Corporation Code of
the Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No.
82819, February 8, 1989, 170 SCRA 79, 82), We held:
"The Court, in National Service Corporation (NASECO) v.
National Labor Relations Commission, G.R. No. 69870,
promulgated on 29 November 1988, quoting extensively
from the deliberations of the 1986 Constitutional
Commission in respect of the intent and meaning of the
new phrase with original charter, in effect held that
government-owned and controlled corporations with
original charter refer to corporations chartered by special
law as distinguished from corporations organized under
our general incorporation statute the Corporation Code.
In NASECO, the company involved had been organized under

the general incorporation statute and was a subsidiary of the

National Investment Development Corporation (NIDC) which in
turn was a subsidiary of the Philippine National Bank, a bank
chartered by a special statute. Thus, government-owned or
controlled corporations like NASECO are effectively, excluded
from the scope of the Civil Service." (Emphasis supplied)
Petitioners contention that the Sangguniang Bayan resolution creates the
LWDs assumes that the Sangguniang Bayan has the power to create
corporations. This is a patently baseless assumption. The Local Government
17
Code does not vest in the Sangguniang Bayan the power to create
18
corporations. What the Local Government Code empowers the Sangguniang
Bayan to do is to provide for the establishment of a waterworks system
"subject to existing laws." Thus, Section 447(5)(vii) of the Local Government
Code provides:
SECTION 447. Powers, Duties, Functions and Compensation. (a)
The sangguniang bayan, as the legislative body of the municipality,
shall enact ordinances, approve resolutions and appropriate funds for
the general welfare of the municipality and its inhabitants pursuant to
Section 16 of this Code and in the proper exercise of the corporate
powers of the municipality as provided for under Section 22 of this
Code, and shall:
xxx
(vii) Subject to existing laws, provide for the establishment,
operation, maintenance, and repair of an efficient waterworks
system to supply water for the inhabitants; regulate the
construction, maintenance, repair and use of hydrants, pumps,
cisterns and reservoirs; protect the purity and quantity of the
water supply of the municipality and, for this purpose, extend
the coverage of appropriate ordinances over all territory within
the drainage area of said water supply and within one hundred
(100) meters of the reservoir, conduit, canal, aqueduct,
pumping station, or watershed used in connection with the
water service; and regulate the consumption, use or wastage
of water;
x x x. (Emphasis supplied)
The Sangguniang Bayan may establish a waterworks system only in
accordance with the provisions of PD 198. The Sangguniang Bayan has no
power to create a corporate entity that will operate its waterworks system.
However, the Sangguniang Bayan may avail of existing enabling laws, like PD
198, to form and incorporate a water district. Besides, even assuming for the

sake of argument that the Sangguniang Bayan has the power to create
corporations, the LWDs would remain government-owned or controlled
corporations subject to COAs audit jurisdiction. The resolution of the
Sangguniang Bayan would constitute an LWDs special charter, making the
LWD a government-owned and controlled corporation with an original charter.
In any event, the Court has already ruled in Baguio Water District v.
19
Trajano that the Sangguniang Bayan resolution is not the special charter of
LWDs, thus:
While it is true that a resolution of a local sanggunian is still necessary
for the final creation of a district, this Court is of the opinion that said
resolution cannot be considered as its charter, the same being
intended only to implement the provisions of said decree.
Petitioner further contends that a law must create directly and explicitly a
GOCC in order that it may have an original charter. In short, petitioner argues
that one special law cannot serve as enabling law for several GOCCs but only
for one GOCC. Section 16, Article XII of the Constitution mandates that
20
"Congress shall not, except by general law," provide for the creation of
private corporations. Thus, the Constitution prohibits one special law to create
one private corporation, requiring instead a "general law" to create private
corporations. In contrast, the same Section 16 states that "Government-owned
or controlled corporations may be created or established by special charters."
Thus, the Constitution permits Congress to create a GOCC with a special
charter. There is, however, no prohibition on Congress to create several
GOCCs of the same class under one special enabling charter.
The rationale behind the prohibition on private corporations having special
charters does not apply to GOCCs. There is no danger of creating special
privileges to certain individuals, families or groups if there is one special law
creating each GOCC. Certainly, such danger will not exist whether one special
law creates one GOCC, or one special enabling law creates several GOCCs.
Thus, Congress may create GOCCs either by special charters specific to each
GOCC, or by one special enabling charter applicable to a class of GOCCs, like
PD 198 which applies only to LWDs.
Petitioner also contends that LWDs are private corporations because Section 6
21
of PD 198 declares that LWDs "shall be considered quasi-public" in nature.
Petitioners rationale is that only private corporations may be deemed "quasipublic" and not public corporations. Put differently, petitioner rationalizes that a
public corporation cannot be deemed "quasi-public" because such corporation
is already public. Petitioner concludes that the term "quasi-public" can only
apply to private corporations. Petitioners argument is inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of COAs audit
jurisdiction depends on the governments ownership or control of a corporation.

The nature of the corporation, whether it is private, quasi-public, or public is

immaterial.
The Constitution vests in the COA audit jurisdiction over "government-owned
and controlled corporations with original charters," as well as "governmentowned or controlled corporations" without original charters. GOCCs with
original charters are subject to COA pre-audit, while GOCCs without original
charters are subject to COA post-audit. GOCCs without original charters refer
to corporations created under the Corporation Code but are owned or
controlled by the government. The nature or purpose of the corporation is not
material in determining COAs audit jurisdiction. Neither is the manner of
creation of a corporation, whether under a general or special law.
The determining factor of COAs audit jurisdiction is government ownership
or control of the corporation. In Philippine Veterans Bank Employees
22
Union-NUBE v. Philippine Veterans Bank, the Court even ruled that the
criterion of ownership and control is more important than the issue of original
charter, thus:
This point is important because the Constitution provides in its Article
IX-B, Section 2(1) that "the Civil Service embraces all branches,
subdivisions, instrumentalities, and agencies of the Government,
including government-owned or controlled corporations with original
charters." As the Bank is not owned or controlled by the
Government although it does have an original charter in the form
23
of R.A. No. 3518, it clearly does not fall under the Civil Service
and should be regarded as an ordinary commercial corporation.
Section 28 of the said law so provides. The consequence is that the
relations of the Bank with its employees should be governed by the
labor laws, under which in fact they have already been paid some of
their claims. (Emphasis supplied)
Certainly, the government owns and controls LWDs. The government
organizes LWDs in accordance with a specific law, PD 198. There is no private
party involved as co-owner in the creation of an LWD. Just prior to the creation
of LWDs, the national or local government owns and controls all their assets.
The government controls LWDs because under PD 198 the municipal or city
mayor, or the provincial governor, appoints all the board directors of an LWD
24
for a fixed term of six years. The board directors of LWDs are not co-owners
of the LWDs. LWDs have no private stockholders or members. The board
directors and other personnel of LWDs are government employees subject to
25
26
civil service laws and anti-graft laws.
While Section 8 of PD 198 states that "[N]o public official shall serve as
director" of an LWD, it only means that the appointees to the board of directors
of LWDs shall come from the private sector. Once such private sector
representatives assume office as directors, they become public officials

governed by the civil service law and anti-graft laws. Otherwise, Section 8 of
PD 198 would contravene Section 2(1), Article IX-B of the Constitution
declaring that the civil service includes "government-owned or controlled
corporations with original charters."
If LWDs are neither GOCCs with original charters nor GOCCs without original
charters, then they would fall under the term "agencies or instrumentalities" of
the government and thus still subject to COAs audit jurisdiction. However, the
27
stark and undeniable fact is that the government owns LWDs. Section 45 of
PD 198 recognizes government ownership of LWDs when Section 45 states
that the board of directors may dissolve an LWD only on the condition that
"another public entity has acquired the assets of the district and has
assumed all obligations and liabilities attached thereto." The implication is clear
that an LWD is a public and not a private entity.
Petitioner does not allege that some entity other than the government owns or
controls LWDs. Instead, petitioner advances the theory that the "Water
28
Districts owner is the District itself." Assuming for the sake of argument that
29
an LWD is "self-owned," as petitioner describes an LWD, the government in
any event controls all LWDs. First, government officials appoint all LWD
directors to a fixed term of office. Second, any per diem of LWD directors in
excess of P50 is subject to the approval of the Local Water Utilities
Administration, and directors can receive no other compensation for their
30
services to the LWD. Third, the Local Water Utilities Administration can
31
require LWDs to merge or consolidate their facilities or operations. This
element of government control subjects LWDs to COAs audit jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs became private
entities through the transfer of ownership of water facilities from local
government units to their respective water districts as mandated by PD 198.
Petitioner is grasping at straws. Privatization involves the transfer of
government assets to a private entity. Petitioner concedes that the owner of
the assets transferred under Section 6 (c) of PD 198 is no other than the LWD
32
itself. The transfer of assets mandated by PD 198 is a transfer of the water
systems facilities "managed, operated by or under the control of such city,
33
municipality or province to such (water) district." In short, the transfer is from
one government entity to another government entity. PD 198 is bereft of any
indication that the transfer is to privatize the operation and control of water
systems.
Finally, petitioner claims that even on the assumption that the government
owns and controls LWDs, Section 20 of PD 198 prevents COA from auditing
34
LWDs. Section 20 of PD 198 provides:
Sec. 20. System of Business Administration. The Board shall, as
soon as practicable, prescribe and define by resolution a system of
business administration and accounting for the district, which shall be

patterned upon and conform to the standards established by the

Administration. Auditing shall be performed by a certified public
accountant not in the government service. The Administration may,
however, conduct annual audits of the fiscal operations of the district to
be performed by an auditor retained by the Administration. Expenses
incurred in connection therewith shall be borne equally by the water
35
district concerned and the Administration. (Emphasis supplied)
Petitioner argues that PD 198 expressly prohibits COA auditors, or any
government auditor for that matter, from auditing LWDs. Petitioner asserts that
this is the import of the second sentence of Section 20 of PD 198 when it
states that "[A]uditing shall be performed by a certified public accountant not in
36
the government service."
PD 198 cannot prevail over the Constitution. No amount of clever legislation
can exclude GOCCs like LWDs from COAs audit jurisdiction. Section 3, Article
IX-C of the Constitution outlaws any scheme or devise to escape COAs audit
jurisdiction, thus:
Sec. 3. No law shall be passed exempting any entity of the
Government or its subsidiary in any guise whatever, or any
investment of public funds, from the jurisdiction of the Commission on
Audit. (Emphasis supplied)
The framers of the Constitution added Section 3, Article IX-D of the
Constitution precisely to annul provisions of Presidential Decrees, like that of
Section 20 of PD 198, that exempt GOCCs from COA audit. The following
exchange in the deliberations of the Constitutional Commission elucidates this
intent of the framers:
MR. OPLE: I propose to add a new section on line 9, page 2 of the
amended committee report which reads: NO LAW SHALL BE
PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS
SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS
OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE
COMMISSION ON AUDIT.
May I explain my reasons on record.
We know that a number of entities of the government took
advantage of the absence of a legislature in the past to obtain
presidential decrees exempting themselves from the jurisdiction
of the Commission on Audit, one notable example of which is the
Philippine National Oil Company which is really an empty shell. It is a
holding corporation by itself, and strictly on its own account. Its funds
were not very impressive in quantity but underneath that shell there

were billions of pesos in a multiplicity of companies. The PNOC the

empty shell under a presidential decree was covered by the
jurisdiction of the Commission on Audit, but the billions of pesos
invested in different corporations underneath it were exempted from
the coverage of the Commission on Audit.
Another example is the United Coconut Planters Bank. The
Commission on Audit has determined that the coconut levy is a form of
taxation; and that, therefore, these funds attributed to the shares of
1,400,000 coconut farmers are, in effect, public funds. And that was, I
think, the basis of the PCGG in undertaking that last major
sequestration of up to 94 percent of all the shares in the United
Coconut Planters Bank. The charter of the UCPB, through a
presidential decree, exempted it from the jurisdiction of the
Commission on Audit, it being a private organization.
So these are the fetuses of future abuse that we are slaying right here
with this additional section.
May I repeat the amendment, Madam President: NO LAW SHALL BE
PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS
SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS
OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE
COMMISSION ON AUDIT.
THE PRESIDENT: May we know the position of the Committee on the
proposed amendment of Commissioner Ople?
MR. JAMIR: If the honorable Commissioner will change the number of
the section to 4, we will accept the amendment.
MR. OPLE: Gladly, Madam President. Thank you.
MR. DE CASTRO: Madam President, point of inquiry on the new
amendment.
THE PRESIDENT: Commissioner de Castro is recognized.
MR. DE CASTRO: Thank you. May I just ask a few questions of
Commissioner Ople.
Is that not included in Section 2 (1) where it states: "(c) governmentowned or controlled corporations and their subsidiaries"? So that if
these government-owned and controlled corporations and their
subsidiaries are subjected to the audit of the COA, any law exempting

certain government corporations or subsidiaries will be already

unconstitutional.

functions for purposes of paying additional compensation to said

officials and employees. (Emphasis supplied)

So I believe, Madam President, that the proposed amendment is

unnecessary.

Claiming that Section 18 is "absolute and leaves no doubt," petitioner asks

COA to discontinue its practice of charging auditing fees to LWDs since such
practice allegedly violates the law.

MR. MONSOD: Madam President, since this has been accepted, we

would like to reply to the point raised by Commissioner de Castro.
THE PRESIDENT: Commissioner Monsod will please proceed.
MR. MONSOD: I think the Commissioner is trying to avoid the situation
that happened in the past, because the same provision was in the
1973 Constitution and yet somehow a law or a decree was passed
where certain institutions were exempted from audit. We are just
reaffirming, emphasizing, the role of the Commission on Audit so that
37
this problem will never arise in the future.
There is an irreconcilable conflict between the second sentence of Section 20
of PD 198 prohibiting COA auditors from auditing LWDs and Sections 2(1) and
3, Article IX-D of the Constitution vesting in COA the power to audit all GOCCs.
We rule that the second sentence of Section 20 of PD 198 is unconstitutional
since it violates Sections 2(1) and 3, Article IX-D of the Constitution.
On the Legality of COAs
Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for audit services
38
violate the prohibition in Section 18 of RA 6758, which states:
Sec. 18. Additional Compensation of Commission on Audit Personnel
and of other Agencies. In order to preserve the independence and
integrity of the Commission on Audit (COA), its officials and employees
are prohibited from receiving salaries, honoraria, bonuses, allowances
or other emoluments from any government entity, local government
unit, government-owned or controlled corporations, and government
financial institutions, except those compensation paid directly by
COA out of its appropriations and contributions.
Government entities, including government-owned or controlled
corporations including financial institutions and local government units
are hereby prohibited from assessing or billing other government
entities, including government-owned or controlled corporations
including financial institutions or local government units for services
rendered by its officials and employees as part of their regular

39

Petitioners claim has no basis.

Section 18 of RA 6758 prohibits COA personnel from receiving any kind of
compensation from any government entity except "compensation paid
directly by COA out of its appropriations and contributions." Thus, RA
6758 itself recognizes an exception to the statutory ban on COA personnel
40
receiving compensation from GOCCs. In Tejada v. Domingo, the Court
declared:
There can be no question that Section 18 of Republic Act No. 6758 is
designed to strengthen further the policy x x x to preserve the
independence and integrity of the COA, by explicitly PROHIBITING:
(1) COA officials and employees from receiving salaries, honoraria,
bonuses, allowances or other emoluments from any government entity,
local government unit, GOCCs and government financial institutions,
except such compensation paid directly by the COA out of its
appropriations and contributions, and (2) government entities,
including GOCCs, government financial institutions and local
government units from assessing or billing other government entities,
GOCCs, government financial institutions or local government units for
services rendered by the latters officials and employees as part of
their regular functions for purposes of paying additional compensation
to said officials and employees.
xxx
The first aspect of the strategy is directed to the COA itself, while the
second aspect is addressed directly against the GOCCs and
government financial institutions. Under the first, COA personnel
assigned to auditing units of GOCCs or government financial
institutions can receive only such salaries, allowances or fringe
benefits paid directly by the COA out of its appropriations and
contributions. The contributions referred to are the cost of audit
services earlier mentioned which cannot include the extra
emoluments or benefits now claimed by petitioners. The COA is
further barred from assessing or billing GOCCs and government
financial institutions for services rendered by its personnel as part of
their regular audit functions for purposes of paying additional
compensation to such personnel. x x x. (Emphasis supplied)

In Tejada, the Court explained the meaning of the word "contributions" in

Section 18 of RA 6758, which allows COA to charge GOCCs the cost of its
audit services:
x x x the contributions from the GOCCs are limited to the cost of audit
services which are based on the actual cost of the audit function in the
corporation concerned plus a reasonable rate to cover overhead
expenses. The actual audit cost shall include personnel services,
maintenance and other operating expenses, depreciation on capital
and equipment and out-of-pocket expenses. In respect to the
allowances and fringe benefits granted by the GOCCs to the COA
personnel assigned to the formers auditing units, the same shall be
41
directly defrayed by COA from its own appropriations x x x.
COA may charge GOCCs "actual audit cost" but GOCCs must pay the same
directly to COA and not to COA auditors. Petitioner has not alleged that COA
charges LWDs auditing fees in excess of COAs "actual audit cost." Neither
has petitioner alleged that the auditing fees are paid by LWDs directly to
individual COA auditors. Thus, petitioners contention must fail.
WHEREFORE, the Resolution of the Commission on Audit dated 3 January
2000 and the Decision dated 30 January 2001 denying petitioners Motion for
Reconsideration are AFFIRMED. The second sentence of Section 20 of
Presidential Decree No. 198 is declared VOID for being inconsistent with
Sections 2 (1) and 3, Article IX-D of the Constitution. No costs.
SO ORDERED.
Davide, Jr., C.J., Puno, Vitug, Panganiban, Quisumbing, Ynares-Santiago,
Sandoval-Gutierrez, Austria-Martinez, Corona, Carpio-Morales, Callejo, Sr.,
and Azcuna, and Tinga, JJ., concur.

G.R. No. L-22619

December 2, 1924

NATIONAL COAL COMPANY, plaintiff-appellee,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellant.
Attorney-General Villa-Real for appellant.
Perfecto J. Salas Rodriguez for appellee.
JOHNSON, J.:
This action was brought in the Court of First Instance of the City of Manila on
the 17th day of July, 1923, for the purpose of recovering the sum of
P12,044.68, alleged to have been paid under protest by the plaintiff company
to the defendant, as specific tax on 24,089.3 tons of coal. Said company is a
corporation created by Act No. 2705 of the Philippine Legislature for the
purpose of developing the coal industry in the Philippine Islands and is actually
engaged in coal mining on reserved lands belonging to the Government. It
claimed exemption from taxes under the provision of sections 14 and 15 of Act
No. 2719, and prayed for a judgment ordering the defendant to refund to the
plaintiff said sum of P12,044.68, with legal interest from the date of the
presentation of the complaint, and costs against the defendant.
The defendant answered denying generally and specifically all the material
allegations of the complaint, except the legal existence and personality of the
plaintiff. As a special defense, the defendant alleged (a) that the sum of
P12,044.68 was paid by the plaintiff without protests, and (b) that said sum
was due and owing from the plaintiff to the Government of the Philippine
Islands under the provisions of section 1496 of the Administrative Code and
prayed that the complaint be dismissed, with costs against the plaintiff.
Upon the issue thus presented, the case was brought on for trial. After a
consideration of the evidence adduced by both parties, the Honorable Pedro
Conception, judge, held that the words "lands owned by any person, etc.," in
section 15 of Act No. 2719 should be understood to mean "lands held in lease
or usufruct," in harmony with the other provision of said Act; that the coal lands
possessed by the plaintiff, belonging to the Government, fell within the
provisions of section 15 of Act No. 2719; and that a tax of P0.04 per ton of
1,016 kilos on each ton of coal extracted therefrom, as provided in said
section, was the only tax which should be collected from the plaintiff; and
sentenced the defendant to refund to the plaintiff the sum of P11,081.11 which
is the difference between the amount collected under section 1496 of the
Administrative Code and the amount which should have been collected under
the provisions of said section 15 of Act No. 2719. From that sentence the
defendant appealed, and now makes the following assignments of error:

I. The court below erred in holding that section 15 of Act No. 2719 does not
refer to coal lands owned by persons and corporations.

shows that the land does not belong to the plaintiff, then the judgment should
be reversed, unless the plaintiff's rights fall under section 3 of said Act.

II. The court below erred in holding that the plaintiff was not subject to the tax
prescribed in section 1496 of the Administrative Code.

The only witness presented by the plaintiff upon the question of the ownership
of the land in question was Mr. Dalmacio Costas, who stated that he was a
member of the board of directors of the plaintiff corporation; that the plaintiff
corporation took possession of the land in question by virtue of the
proclamation of the Governor-General, known as Proclamation No. 39 of the
year 1917; that no document had been issued in favor of the plaintiff
corporation; that said corporation had received no permission from the
Secretary of Agriculture and Natural Resources; that it took possession of said
lands covering an area of about 400 hectares, from which the coal in question
was mined, solely, by virtue of said proclamation (Exhibit B, No. 39).

The question confronting us in this appeal is whether the plaintiff is subject to

the taxes under section 15 of Act No. 2719, or to the specific taxes under
section 1496 of the Administrative Code.
The plaintiff corporation was created on the 10th day of March, 1917, by Act
No. 2705, for the purpose of developing the coal industry in the Philippine
Island, in harmony with the general plan of the Government to encourage the
development of the natural resources of the country, and to provided facilities
therefor. By said Act, the company was granted the general powers of a
corporation "and such other powers as may be necessary to enable it to
prosecute the business of developing coal deposits in the Philippine Island and
of mining, extracting, transporting and selling the coal contained in said
deposits." (Sec. 2, Act No. 2705.) By the same law (Act No. 2705) the
Government of the Philippine Islands is made the majority stockholder,
evidently in order to insure proper government supervision and control, and
thus to place the Government in a position to render all possible
encouragement, assistance and help in the prosecution and furtherance of the
company's business.
On May 14, 1917, two months after the passage of Act No. 2705, creating the
National Coal Company, the Philippine Legislature passed Act No. 2719 "to
provide for the leasing and development of coal lands in the Philippine
Islands." On October 18, 1917, upon petition of the National Coal Company,
the Governor-General, by Proclamation No. 39, withdrew "from settlement,
entry, sale or other disposition, all coal-bearing public lands within the Province
of Zamboanga, Department of Mindanao and Sulu, and the Island of Polillo,
Province of Tayabas." Almost immediately after the issuance of said
proclamation the National Coal Company took possession of the coal lands
within the said reservation, with an area of about 400 hectares, without any
further formality, contract or lease. Of the 30,000 shares of stock issued by the
company, the Government of the Philippine Islands is the owner of 29,809
shares, that is, of 99 1/3 per centum of the whole capital stock.
If we understand the theory of the plaintiff-appellee, it is, that it claims to be the
owner of the land from which it has mined the coal in question and is therefore
subject to the provisions of section 15 of Act No. 2719 and not to the provisions
of the section 1496 of the Administrative Code. That contention of the plaintiff
leads us to an examination of the evidence upon the question of the ownership
of the land from which the coal in question was mined. Was the plaintiff the
owner of the land from which the coal in question was mined? If the evidence
shows the affirmative, then the judgment should be affirmed. If the evidence

Said proclamation (Exhibit B) was issued by Francis Burton Harrison, then

Governor-General, on the 18th day of October, 1917, and provided: "Pursuant
to the provision of section 71 of Act No. 926, I hereby withdraw from
settlement, entry, sale, or other disposition, all coal-bearing public lands within
the Province of Zamboanga, Department of Mindanao and Sulu, and the Island
of Polillo, Province of Tayabas." It will be noted that said proclamation only
provided that all coal-bearing public lands within said province and island
should be withdrawn from settlement, entry, sale, or other disposition. There is
nothing in said proclamation which authorizes the plaintiff or any other person
to enter upon said reversations and to mine coal, and no provision of law has
been called to our attention, by virtue of which the plaintiff was entitled to enter
upon any of the lands so reserved by said proclamation without first obtaining
permission therefor.
The plaintiff is a private corporation. The mere fact that the Government
happens to the majority stockholder does not make it a public corporation. Act
No. 2705, as amended by Act No. 2822, makes it subject to all of the
provisions of the Corporation Law, in so far as they are not inconsistent with
said Act (No. 2705). No provisions of Act No. 2705 are found to be inconsistent
with the provisions of the Corporation Law. As a private corporation, it has no
greater rights, powers or privileges than any other corporation which might be
organized for the same purpose under the Corporation Law, and certainly it
was not the intention of the Legislature to give it a preference or right or
privilege over other legitimate private corporations in the mining of coal. While
it is true that said proclamation No. 39 withdrew "from settlement, entry, sale,
or other disposition of coal-bearing public lands within the Province of
Zamboanga . . . and the Island of Polillo," it made no provision for the
occupation and operation by the plaintiff, to the exclusion of other persons or
corporations who might, under proper permission, enter upon the operate coal
mines.
On the 14th day of May, 1917, and before the issuance of said proclamation,
the Legislature of the Philippine Island in "an Act for the leasing and

development of coal lands in the Philippine Islands" (Act No. 2719), made
liberal provision. Section 1 of said Act provides: "Coal-bearing lands of the
public domain in the Philippine Island shall not be disposed of in any manner
except as provided in this Act," thereby giving a clear indication that no "coalbearing lands of the public domain" had been disposed of by virtue of said
proclamation.

the plaintiff is obliged to pay the internal revenue duty provided for in section
1496 of the Administrative Code. That being the issue, an examination of the
provisions of Act No. 2719 becomes necessary.

Neither is there any provision in Act No. 2705 creating the National Coal
Company, nor in the amendments thereof found in Act No. 2822, which
authorizes the National Coal Company to enter upon any of the reserved coal
lands without first having obtained permission from the Secretary of Agriculture
and Natural Resources.lawphi1.net

First. All "coal-bearing lands of the public domain in the Philippine Islands shall
not be disposed of in any manner except as provided in this Act." Second.
Provisions for leasing by the Secretary of Agriculture and Natural Resources of
"unreserved, unappropriated coal-bearing public lands," and the obligation to
the Government which shall be imposed by said Secretary upon the
lessee.lawphi1.net

An examination of said Act (No. 2719) discloses the following facts important
for consideration here:

The following propositions are fully sustained by the facts and the law:
(1) The National Coal Company is an ordinary private corporation organized
under Act No. 2705, and has no greater powers nor privileges than the
ordinary private corporation, except those mentioned, perhaps, in section 10 of
Act No. 2719, and they do not change the situation here.
(2) It mined on public lands between the month of July, 1920, and the months
of March, 1922, 24,089.3 tons of coal.
(3) Upon demand of the Collector of Internal Revenue it paid a tax of P0.50 a
ton, as taxes under the provisions of article 1946 of the Administrative Code on
the 15th day of December, 1922.
(4) It is admitted that it is neither the owner nor the lessee of the lands upon
which said coal was mined.
(5) The proclamation of Francis Burton Harrison, Governor-General, of the
18th day of October, 1917, by authority of section 1 of Act No. 926,
withdrawing from settlement, entry, sale, or other dispositon all coal-bearing
public lands within the Province of Zamboanga and the Island of Polillo, was
not a reservation for the benefit of the National Coal Company, but for any
person or corporation of the Philippine Islands or of the United States.
(6) That the National Coal Company entered upon said land and mined said
coal, so far as the record shows, without any lease or other authority from
either the Secretary of Agriculture and Natural Resources or any person having
the power to grant a leave or authority.
From all of the foregoing facts we find that the issue is well defined between
the plaintiff and the defendant. The plaintiff contends that it was liable only to
pay the internal revenue and other fees and taxes provided for under section
15 of Act No. 2719; while the defendant contends, under the facts of record,

Third. The internal revenue duty and tax which must be paid upon coal-bearing
lands owned by any person, firm, association or corporation.
To repeat, it will be noted, first, that Act No. 2719 provides an internal revenue
duty and tax upon unreserved, unappropriated coal-bearing public lands which
may be leased by the Secretary of Agriculture and Natural Resources; and,
second, that said Act (No. 2719) provides an internal revenue duty and tax
imposed upon any person, firm, association or corporation, who may be the
owner of "coal-bearing lands." A reading of said Act clearly shows that the tax
imposed thereby is imposed upon two classes of persons only lessees and
owners.
The lower court had some trouble in determining what was the correct
interpretation of section 15 of said Act, by reason of what he believed to be
some difference in the interpretation of the language used in Spanish and
English. While there is some ground for confusion in the use of the language in
Spanish and English, we are persuaded, considering all the provisions of said
Act, that said section 15 has reference only to persons, firms, associations or
corporations which had already, prior to the existence of said Act, become the
owners of coal lands. Section 15 cannot certainty refer to "holders or lessees of
coal lands' for the reason that practically all of the other provisions of said Act
has reference to lessees or holders. If section 15 means that the persons,
firms, associations, or corporation mentioned therein are holders or lessees of
coal lands only, it is difficult to understand why the internal revenue duty and
tax in said section was made different from the obligations mentioned in
section 3 of said Act, imposed upon lessees or holders.
From all of the foregoing, it seems to be made plain that the plaintiff is neither a
lessee nor an owner of coal-bearing lands, and is, therefore, not subject to any
other provisions of Act No. 2719. But, is the plaintiff subject to the provisions of
section 1496 of the Administrative Code?

Section 1496 of the Administrative Code provides that "on all coal and coke
there shall be collected, per metric ton, fifty centavos." Said section (1496) is a
part of article, 6 which provides for specific taxes. Said article provides for a
specific internal revenue tax upon all things manufactured or produced in the
Philippine Islands for domestic sale or consumption, and upon things imported
from the United States or foreign countries. It having been demonstrated that
the plaintiff has produced coal in the Philippine Islands and is not a lessee or
owner of the land from which the coal was produced, we are clearly of the
opinion, and so hold, that it is subject to pay the internal revenue tax under the
provisions of section 1496 of the Administrative Code, and is not subject to the
payment of the internal revenue tax under section 15 of Act No. 2719, nor to
any other provisions of said Act.

G.R. No. 72807

Therefore, the judgment appealed from is hereby revoked, and the defendant
is hereby relieved from all responsibility under the complaint. And, without any
finding as to costs, it is so ordered.

NARVASA, J.:p

Street, Malcolm, Avancea, Villamor, Ostrand and Romualdez, JJ., concur.

September 9, 1991

MARILAO WATER CONSUMERS ASSOCIATION, INC., petitioners,

vs.
INTERMEDIATE APPELLATE COURT, MUNICIPALITY OF MARILAO,
BULACAN, SANGGUNIANG BAYAN, MARILAO, BULACAN, and MARILAO
WATER DISTRICT, respondents.
Magtanggol C. Gunigundo for petitioner.
Prospero A. Crescini for Marilao Water District.

Involved in this appeal is the determination of which triburial has jurisdiction

over the dissolution of a water district organized and operating as a quasipublic corporation under the provisions of Presidential Decree No. 198, as
1
amended;
the Regional Trial Court, or the Securities & Exchange
Commission.
PD 198 authorizes the formation, lays down the powers and functions, and
governs the operation of water districts throughout the country; it is "the source
of authorization and power to form and maintain a (water) district." Once
formed, it says, a district is subject to its provisions and is not under the
2
jurisdiction of any political subdivision.
Under PD 198, water districts may be created by the different local legislative
bodies by the passage of a resolution to this effect, subject to the terms of the
decree. The primary function of these water districts is to sell water to residents
within their territory, under such schedules of rates and charges as may be
3
determined by their boards. They shall manage, administer, operate and
maintain all watersheds within their territorial boundaries, safeguard and
protect the use of the waters therein, supervise and control structures within
their service areas, and prohibit any person from selling or otherwise disposing
of water for public purposes within their service areas where district facilities
4
are available to provide such service.
The decree specifies the terms under which water districts may be formed and
operate. It prescribes, particularly
a) the name by which a water district shad be known, which shall be contained
in the enabling resolution, and shall include the name of the city, municipality,
or province, or region thereof, served by said system, followed by the words,
5
'Water District;'

b) the number and qualifications of the members of the boards of directors,

6
with the date of expiration of term of office for each; the manner of their
7
selection and initial appointment by the head of the local political subdivision;
their terms of office (which shall be in staggered periods of two, four and six
8
9
years); the manner of filling up vacancies in the board; the compensation
10
and liabilities of members of the board.
The resolution shall contain a
"statement that the district may only be dissolved on the grounds and under the
conditions set forth in Section 44" of the law, but nothing in the resolution of
formation, the decree adds, "shall state or infer that the local legislative body
has the power to dissolve, alter or affect the district beyond that specifically
11
provided for in this Act."
The juridical entities thus created and organized under PD 198 are considered
quasi-public corporations, performing public services and supplying public
wants. They are authorized not only to "exercise all the powers which are
expressly granted" by said decree, and those "which are necessarily implied
from or incidental to" said powers, but also "the power of eminent domain, the
exercise .. (of which) shall however be subject to review by the Administration"
(LWUA). In addition to the powers granted in, and subject to such restrictions
imposed under, the Act, they may also exercise the powers, rights and
12
privileges given to private corporations under existing laws.
The decree also established a government corporation attached to the Office
13
of the President, known as the Local Water Utilities Administration (LWUA)
to function primarily as "a specialized lending institution for the promotion
development and financing of local water utilities." It has the following specific
14
powers and duties;
(1) prescribe minimum standards and regulations in order to
assure acceptable standards of construction materials and
supplies, maintenance, operation, personnel training,
accounting and fiscal practices for local water utilities;
(2) furnish technical assistance and personnel training
programs for local water utilities;
(3) monitor and evaluate local water standards; and
(4) effect systems integration, joint investment and operations,
district annexation and deannexation whenever economically
warranted.
It was pursuant to the foregoing rules and norms that the Marilao Water District
was formed by Resolution of the Sangguniang Bayan of the Municipality of
Marilao dated September 18, 1982, which resolution was thereafter forwarded

to the LWUA and "duly filed" by it on October 4, 1982 after ascertaining that it
15
conformed to the requirements of the law.
The claim was thereafter made that the creation of the Marilao Water District in
the manner aforestated was defective and illegal. The claim was made by a
non-stock, non-profit corporation known as the Marilao Water Consumers
Association, Inc., in a petition dated December 12, 1983 filed with the Regional
Trial Court at Malolos, Bulacan. Impleaded as respondents were the Marilao
Water District, as well as the Municipality of Marilao, Bulacan; its Sangguniang
Bayan; and Mayor Nicanor V. GUILLERMO. The petition prayed for the
dissolution of the water district on the basis chiefly of the following allegations,
to wit:
1) there had been no real, but only a "farcical" public hearing prior to the
creation of the Water District;
2) not only was the waterworks system turned over to the Water District without
compensation. but a subsidy was illegally authorized for it;
3) the Water District was being run with "negligence, apathy, indifference and
mismanagement," and was not providing adequate and efficient service to the
community, but this notwithstanding, the consumers were being billed in full
and threatened with disconnection for failure to pay bills on time; in fact, one of
the consumers who complained had his water service cut off;
4) the consumers were consequently "forced to organize themselves into a
corporation last October 3, 1983 ... for the purpose of demanding adequate
and sufficient supply of water and efficient management of the waterworks in
16
Marilao, Bulacan.
Acting on the complaint, particularly on the application for temporary
restraining order and preliminary injunction set out therein, the Trial Court
issued an Order on December 22, 1983 setting the application for preliminary
hearing, requiring the respondents to answer the petition and restraining them
until further orders from collecting any water bill, disconnecting any water
service, transferring any property of the waterworks, or disbursing any amount
in favor of any person. The order was modified on January 6, 1984 to allow the
respondents to pay the district's outstanding obligations to Meralco, by way of
exception to the restraining order.
On January 13, 1984 the Marilao Water District filed its Answer with
Compulsory Counterclaim, denying the material allegations of the petition and
asserting as affirmative defenses (a) the Court's lack of jurisdiction of the
subject matter, and (b) the failure of the petition to state a cause of action. The
answer alleged that the matter of the water district's dissolution fell under the
original and exclusive jurisdiction of the Securities & Exchange Commission

(SEC); and the matter of the propriety of water rates, within the primary
administrative jurisdiction of the LWUA and the quasi-judicial jurisdiction of the
National Water Resources Council. On the same date, Marilao Water District
filed a motion for admission of its third-party complaint against the officers and
directors of the petitioner corporation, it being claimed that they had instigated
the filing of the petition simply because one of them was a political adversary of
the respondent Mayor.
The other respondents also filed their answer through the Provincial Fiscal of
Bulacan, setting up the same affirmative defense of lack of jurisdiction on the
part of the Trial Court; and failure of the petition to state a cause of action since
it admitted that it was by resolution of the Marilao Sangguniang Bayan that the
Marilao Water District was constituted.
The petitioner the Marilao Consumers Association filed a reply, and an
answer to the counterclaim, on January 26, 1984. It averred that since the
Marilao Water District had not been organized under the Corporation Code, the
SEC had no jurisdiction over a proceeding for its dissolution; and that under
Section 45 of PD 198, the proceeding to determine if the dissolution of the
water district is for the best interest of the people, is within the competence of a
regular court of justice, and neither the LWUA nor the National Water
Resources Council is competent to take cognizance of the matter of dissolution
of the water district and recovery of its waterworks system, or the exorbitant
rates imposed by it. The Consumers Association also opposed admission of
the third-party complaint on the ground that its individual officers are not
17
personally amenable to suit for acts of the corporation,
which has a
personality distinct from theirs.
The Trial Court found for the respondents. It dismissed the Consumers
Association's suit by Order handed down on June 8, 1984 which pertinently
reads as follows:
After a consideration of the arguments raised by the herein
parties, the Court is more inclined to take the position of the
respondents that the Securities and Exchange Commission
has the exclusive and original jurisdiction over this case.
WHEREFORE, the instant petition, the third-party complaint,
and the compulsory counterclaim filed herein are hereby
DISMISSED, for lack of jurisdiction.
Its motion for reconsideration having been denied, by Order dated September
20, 1984, the Consumers Association filed with this Court a petition for review
on certiorari, which was docketed as G.R. No. 68742. The case was however
referred to the Intermediate Appellate Court by this Court's Second Division, in

a Resolution dated November 19, 1984, where it was docketed as AC-G.R.

S.P. No. 04862.
But there in the Intermediate Appellate Court, the Consumers Association's
cause also met with failure. The Appellate Court, in its Decision promulgated
on September 10, 1985, ruled that its cause could not prosper because
1) it had availed of the wrong remedy, i.e., the special civil action of certiorari;
the Order of June 8, 1984 being a final order in the sense that it "left nothing
else to be done in the case the proper remedy was appeal under Rule 41 of
the Rules of Court and not a certiorari suit under Rule 65; and
2) even if the certiorari action be treated as an appeal, it was 14 unerringly
clear that the controversy ... falls within the competence of the SEC in virtue of
18
P.D. 902-A
Which provides that said agency "shall have original and
exclusive jurisdiction to hear and decide cases involving:
a) xxx xxx xxx
b) Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders,
members or associates, respectively; and between such
corporation, partnership or association and the state insofar as
it concerns their individual franchise or right to exist as such
entity ...
The Appellate Court subsequently denied the petitioner's motion for
reconsideration, by Resolution dated November 4, 1985. Hence, the petition
for review on certiorari at bar, in which reversal of the Appellate Tribunal's
decision is sought, the petitioner insisting that the remedy resorted to by it was
correct but misunderstood by the I.A.C. and that the law does indeed vest
exclusive jurisdiction over the subject matter of the case in the Regional Trial
Court, not the Securities and Exchange Commission.
Turning first to the adjective issue, it is quite evident that the Order of the Trial
Court of June 8, 1984, dismissing the action of the Consumers Association, is
really a final order; it finally disposed of the proceeding and left nothing more to
be done by the Court on the merits. Now, the firmly settled principle is that the
remedy against such a final order is the ordinary remedy of an appeal, either
solely on questions of law in which case the appeal may be taken only to
the Supreme Court or questions of fact and law in which event the appeal
should be brought to the Court of Appeals. The extraordinary remedy of a
special civil action of certiorari or prohibition is not the appropriate recourse
because precisely, one of the conditions for availing of it is that there should be

"no appeal, nor any plain, speedy and adequate remedy in the ordinary course
19
of law.
A resort to the latter instead of the former would ordinarily be fatal,
unless it should appear in a given case that appeal would otherwise be an
20
inefficacious or inadequate remedy.
In holding that Marilao Water District had resorted to the wrong remedy against
the Trial Court's order dismissing its suit, i.e., the special civil action of
certiorari, instead of an appeal, the Intermediate Appellate Court quite
overlooked the fact, not seriously disputed by the Marilao Water District and its
co-respondents, that the former had in fact availed of the remedy of appeal by
certiorari under Rule 45 of the Rules of Court, as required by paragraph 25 of
the Interim Rules & Guidelines of this Court, implementing Batas Pambansa
Bilang 129; that before doing so, it had first asked for and been granted an
extension of thirty (30) days within which to file a petition for review on
certiorari; but that subsequently, by Resolution of this Court's Second Division
dated November 19, 1984, the case was referred to the Intermediate Appellate
Court, evidently because it was felt that certain factual issues had yet to be
determined. In any case, all things considered, the Court is not prepared to
have the case at bar finally determined on this procedural issue.
The juridical entities known as water districts created by PD 198, although
considered as quasi-public corporations and authorized to exercise the
powers, rights and privileges given to private corporations under existing laws
21
are entirely distinct from corporations organized under the Corporation Code,
PD 902-A, as amended. The Corporation Code has nothing whatever to do
with their formation and organization, all the terms and conditions for their
organization and operation being particularly spelled out in PD 198. The
resolutions creating them, their charters, in other words, are filed not with the
Securities and Exchange Commission but with the LWUA. It is these
resolutions qua charters, and not articles of incorporation drawn up under the
Corporation Code, which set forth the name of the water districts, the number
of their directors, the manner of their selection and replacement, their powers,
etc. The SEC which is charged with enforcement of the Corporation Code as
regards corporations, partnerships and associations formed or operating under
its provisions, has no power of supervision or control over the activities of
water districts. More particularly, the SEC has no power of oversight over such
activities of water districts as selling water, fuling the rates and charges
22
therefor
or the management, administration, operation and maintenance of
watersheds within their territorial boundaries, or the safeguarding and
protection of the use of the waters therein, or the supervision and control of
structures within the service areas of the district, and the prohibition of any
person from selling or otherwise disposing of water for public purposes within
their service areas where district facilities are available to provide such service.
23
That function of supervision or control over water districts is entrusted to the
24
Local Water Utilities Administration. Consequently, as regards the activities
of water districts just mentioned, the SEC obviously can have no claim to any
expertise.

The "Provincial Water Utilities Act of 1973" has a specific provision governing
25
dissolution of water districts created thereunder This is Section 45 of PD 198
reading as follows:
SEC. 45. Dissolution. A district may be dissolved by
resolution of its board of directors filed in the manner of filing
the resolution forming the district: Provided, however, That
prior to the adoption of any such resolution: (1) another public
entity has acquired the assets of the district and has assumed
all obligations and liabilities attached thereto; (2) all
bondholders and other creditors have been notified and they
consent to said transfer and dissolution; and (3) a court of
competent jurisdiction has found that said transfer and
dissolution are in the best interest of the public.
Under this provision, it is the LWUA which is the administrative body involved
in the voluntary dissolution of a water district; it is with it that the resolution of
dissolution is filed, not the Securities and Exchange Commission. And this
provision is evidently quite distinct and different from those on dissolution of
corporations "formed or organized under the provisions of xx (the Corporation)
Code" set out in Sections 117 to 121, inclusive, of said Code, under which
dissolution may be voluntary (by vote of the stockholders or members),
generally effected by the filing of the corresponding resolution with the
Securities and Exchange Commission, or involuntary, commenced by the filing
of a verified complaint also with the SEC.
All these argue against conceding jurisdiction in the Securities and Exchange
Commission over proceedings for the dissolution of water districts. For
although described as quasipublic corporations, and granted the same powers
as private corporations, water districts are not really corporations. They have
no incorporators, stockholders or members, who have the right to vote for
directors, or amend the articles of incorporation or by-laws, or pass resolutions,
or otherwise perform such other acts as are authorized to stockholders or
members of corporations by the Corporation Code. In a word, there can be no
such thing as a relation of corporation and stockholders or members in a water
district for the simple reason that in the latter there are no stockholders or
members. Between the water district and those who are recipients of its water
services there exists not the relationship of corporation-and-stockholder, but
that of a service agency and users or customers. There can therefore be no
such thing in a water district as "intra-corporate or partnership relations,
between and among stockholders, members or associates (or) between any or
all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively," within the contemplation
of Section 5 of the Corporation Code so as to bring controversies involving
them within the competence and cognizance of the SEC.

There can be even less debate about the fact that the SEC has no jurisdiction
over the co-respondents of the Marilao Water District the Municipality of
Marilao, its Sangguniang Bayan and its Mayor who are accused of a
"conspiracy" with the water district in respect of the anomalies described in the
26
Consumer Associations' petition.
The controversy, therefore, between the Consumers Association, on the one
hand, and Marilao District and its co-respondents, on the other, is not within
the jurisdiction of the SEC.
In their answer with counterclaim in the proceedings a quo, the respondents
advocated the theory that the case falls within the jurisdiction of the LWUA
and/or the National Water Resources Council.

was being run with "negligence, apathy, indifference and mismanagement,"

32
and was not providing adequate and efficient service to the community.
Now, as already above stated, the dissolution of a water district is governed by
Section 45 of PD 198, as amended, stating that it "may be dissolved by
resolution of its board of directors filed in the manner of filing the resolution
33
forming the district," subject to enumerated pre-requisites. The procedure for
dissolution thus consists of the following steps:
1) the initiation by the board of directors of the water district motu proprio or at
the relation of an interested party, of proceedings for the dissolution of the
water district, including:
a) the ascertainment by said board that

The LWUA does not appear to have any adjudicatory functions. It is, as
already pointed out, "primarily a specialized lending institution for the
27
promotion, development and financing of local water utilities,
with power to
prescribe minimum standards and regulations regarding maintenance,
operation, personnel training, accounting and fiscal practices for local water
utilities, to furnish technical assistance and personnel training programs
therefor; monitor and evaluate local water standards; and effect systems
integration, joint investment and operations, district annexation and
28
deannexation whenever economically warranted.
The LWUA has quasijudicial power only as regards rates or charges fixed by water districts, which it
may review to establish compliance with the provisions of PD 198, without
prejudice to appeal being taken therefrom by a water concessionaire to the
National Water Resources Council whose decision thereon shall be appealable
29
to the Office of the President.
The rates or charges established by
respondent Marilao Water District do not appear to be at issue in the
controversy at bar.
The National Water Resources Council, on the other hand, is conferred
"original jurisdiction over all disputes relating to appropriation, utilization,
exploitation, development, control, conservation and protection of waters within
the meaning and context of the provisions of ..." (the Code by which said
Council was created, Presidential Decree No. 1067, otherwise known as the
30
Water Code of the Philippines);
and its decision on water rights
controversies may be appealed to the Court of First Instance of the province
31
where the subject matter of the controversy is situated. It also has authority
to review questions of annexations and deannexations (addition to or exclusion
from the district of territory). Again it does not appear that the case at bar is a
water rights controversy or one involving annexation or deannexation.
What essentially is sought by the Consumers Association is the dissolution of
the Marilao Water District, on the ground that its formation was illegal and
invalid; the waterworks system had been turned over to it without
compensation and a subsidy illegally authorized for it; and the Water District

1) another public entity has acquired the assets of the district and has
assumed all obligations and liabilities attached thereto; and
2) all bondholders and other creditors have been notified and consent to said
transfer and dissolution;
b) the commencement by the water district in a court of competent jurisdiction
of a proceeding to obtain a declaration that "said transfer and dissolution are in
the best interest of the public;
2) after compliance with the foregoing requisites, the adoption by the board of
directors of the water district of a resolution dissolving the water district and its
submission to the Sangguniang Bayan concerned for approval;
3) submission of the resolution of the Sangguniang Bayan dissolving the water
district to the head of the local government concerned for approval, and
ultimately to the LWUA for final approval and filing.
The Consumer Association's action therefore is, in fine, in the nature of a
mandamus suit, seeking to compel the board of directors of the Marilao Water
District, and its alleged co-conspirators, the Sangguniang Bayan and the
Mayor of Marilao to go through the process above described for the dissolution
of the water district. In this sense, and indeed, taking account of the nature of
the proceedings for dissolution just described, it seems plain that the case
does not fall within the limited jurisdiction of the SEC., but within the general
jurisdiction of Regional Trial Courts.
WHEREFORE, the Decision of the Intermediate Appellate Court of September
10, 1985 affirming that of the Regional Trial Court of June 8, 1984 is
REVERSED and SET ASIDE, and the case is remanded to the Regional Trial

Court for further proceedings and adjudication in accordance with law. No

costs.
SO ORDERED.
Cruz and Medialdea, JJ., concur.
G.R. No. 141735

June 8, 2005

Grio-Aquino, J., took no part.

SAPPARI K. SAWADJAAN, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, THE CIVIL SERVICE
COMMISSION and AL-AMANAH INVESTMENT BANK OF THE
PHILIPPINES, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a petition for certiorari under Rule 65 of the Rules of Court of the
1
Decision of the Court of Appeals of 30 March 1999 affirming Resolutions No.
94-4483 and No. 95-2754 of the Civil Service Commission (CSC) dated 11
August 1994 and 11 April 1995, respectively, which in turn affirmed Resolution
No. 2309 of the Board of Directors of the Al-Amanah Islamic Investment Bank
of the Philippines (AIIBP) dated 13 December 1993, finding petitioner guilty of
Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to
the Best Interest of the Service and dismissing him from the service, and its
2
Resolution of 15 December 1999 dismissing petitioners Motion for
Reconsideration.
The records show that petitioner Sappari K. Sawadjaan was among the first
employees of the Philippine Amanah Bank (PAB) when it was created by virtue
of Presidential Decree No. 264 on 02 August 1973. He rose through the ranks,
working his way up from his initial designation as security guard, to settling
clerk, bookkeeper, credit investigator, project analyst, appraiser/ inspector, and
3
eventually, loans analyst.
In February 1988, while still designated as appraiser/investigator, Sawadjaan
was assigned to inspect the properties offered as collaterals by Compressed
Air Machineries and Equipment Corporation (CAMEC) for a credit line of Five
Million Pesos (P5,000,000.00). The properties consisted of two parcels of land
covered by Transfer Certificates of Title (TCTs) No. N-130671 and No. C4
52576. On the basis of his Inspection and Appraisal Report, the PAB granted
the loan application. When the loan matured on 17 May 1989, CAMEC
requested an extension of 180 days, but was granted only 120 days to repay
5
the loan.

In the meantime, Sawadjaan was promoted to Loans Analyst I on 01 July

6
1989.
In January 1990, Congress passed Republic Act 6848 creating the AIIBP and
repealing P.D. No. 264 (which created the PAB). All assets, liabilities and
7
capital accounts of the PAB were transferred to the AIIBP, and the existing
personnel of the PAB were to continue to discharge their functions unless
8
discharged. In the ensuing reorganization, Sawadjaan was among the
personnel retained by the AIIBP.
When CAMEC failed to pay despite the given extension, the bank, now
referred to as the AIIBP, discovered that TCT No. N-130671 was spurious, the
property described therein non-existent, and that the property covered by TCT
No. C-52576 had a prior existing mortgage in favor of one Divina Pablico.
On 08 June 1993, the Board of Directors of the AIIBP created an Investigating
Committee to look into the CAMEC transaction, which had cost the bank Six
9
Million Pesos (P6,000,000.00) in losses. The subsequent events, as found
10
and decided upon by the Court of Appeals, are as follows:
On 18 June 1993, petitioner received a memorandum from Islamic Bank
[AIIBP] Chairman Roberto F. De Ocampo charging him with Dishonesty in the
Performance of Official Duties and/or Conduct Prejudicial to the Best Interest
of the Service and preventively suspending him.
In his memorandum dated 8 September 1993, petitioner informed the
Investigating Committee that he could not submit himself to the jurisdiction of
the Committee because of its alleged partiality. For his failure to appear before
the hearing set on 17 September 1993, after the hearing of 13 September
1993 was postponed due to the Manifestation of even date filed by petitioner,
the Investigating Committee declared petitioner in default and the prosecution
was allowed to present its evidence ex parte.
On 08 December 1993, the Investigating Committee rendered a decision, the
pertinent portions of which reads as follows:
In view of respondent SAWADJAANS abject failure to perform his duties and
assigned tasks as appraiser/inspector, which resulted to the prejudice and
substantial damage to the Bank, respondent should be held liable therefore. At
this juncture, however, the Investigating Committee is of the considered
opinion that he could not be held liable for the administrative offense of
dishonesty considering the fact that no evidence was adduced to show that he
profited or benefited from being remiss in the performance of his duties. The
record is bereft of any evidence which would show that he received any
amount in consideration for his non-performance of his official duties.

This notwithstanding, respondent cannot escape liability. As adverted to

earlier, his failure to perform his official duties resulted to the prejudice and
substantial damage to the Islamic Bank for which he should be held liable for
the administrative offense of CONDUCT PREJUDICIAL TO THE BEST
INTEREST OF THE SERVICE.
Premises considered, the Investigating Committee recommends that
respondent SAPPARI SAWADJAAN be meted the penalty of SIX (6) MONTHS
and ONE (1) DAY SUSPENSION from office in accordance with the Civil
Service Commissions Memorandum Circular No. 30, Series of 1989.
On 13 December 1993, the Board of Directors of the Islamic Bank [AIIBP]
adopted Resolution No. 2309 finding petitioner guilty of Dishonesty in the
Performance of Official Duties and/or Conduct Prejudicial to the Best Interest
of the Service and imposing the penalty of Dismissal from the Service.
On reconsideration, the Board of Directors of the Islamic Bank [AIIBP] adopted
the Resolution No. 2332 on 20 February 1994 reducing the penalty imposed on
petitioner from dismissal to suspension for a period of six (6) months and one
(1) day.
On 29 March 1994, petitioner filed a notice of appeal to the Merit System
Protection Board (MSPB).
On 11 August 1994, the CSC adopted Resolution No. 94-4483 dismissing the
appeal for lack of merit and affirming Resolution No. 2309 dated 13 December
1993 of the Board of Directors of Islamic Bank.
On 11 April 1995, the CSC adopted Resolution No. 95-2574 denying
petitioners Motion for Reconsideration.
On 16 June 1995, the instant petition was filed with the Honorable Supreme
Court on the following assignment of errors:
I. Public respondent Al-Amanah Islamic Investment Bank of the
Philippines has committed a grave abuse of discretion amounting to
excess or lack of jurisdiction when it initiated and conducted
administrative investigation without a validly promulgated rules of
procedure in the adjudication of administrative cases at the Islamic
Bank.
II. Public respondent Civil Service Commission has committed a grave
abuse of discretion amounting to lack of jurisdiction when it
prematurely and falsely assumed jurisdiction of the case not appealed
to it, but to the Merit System Protection Board.

III. Both the Islamic Bank and the Civil Service Commission erred in
finding petitioner Sawadjaan of having deliberately reporting false
information and therefore guilty of Dishonesty and Conduct Prejudicial
to the Best Interest of the Service and penalized with dismissal from
the service.
On 04 July 1995, the Honorable Supreme Court En Banc referred this petition
to this Honorable Court pursuant to Revised Administrative Circular No. 1-95,
which took effect on 01 June 1995.
We do not find merit [in] the petition.
Anent the first assignment of error, a reading of the records would reveal that
petitioner raises for the first time the alleged failure of the Islamic Bank [AIIBP]
to promulgate rules of procedure governing the adjudication and disposition of
administrative cases involving its personnel. It is a rule that issues not properly
brought and ventilated below may not be raised for the first time on appeal,
save in exceptional circumstances (Casolita, Sr. v. Court of Appeals, 275
SCRA 257) none of which, however, obtain in this case. Granting arguendo
that the issue is of such exceptional character that the Court may take
cognizance of the same, still, it must fail. Section 26 of Republic Act No. 6848
(1990) provides:
Section 26. Powers of the Board. The Board of Directors shall have the
broadest powers to manage the Islamic Bank, x x x The Board shall adopt
policy guidelines necessary to carry out effectively the provisions of this
Charter as well as internal rules and regulations necessary for the conduct of
its Islamic banking business and all matters related to personnel organization,
office functions and salary administration. (Italics ours)
On the other hand, Item No. 2 of Executive Order No. 26 (1992) entitled
"Prescribing Procedure and Sanctions to Ensure Speedy Disposition of
Administrative Cases" directs, "all administrative agencies" to "adopt and
include in their respective Rules of Procedure" provisions designed to
abbreviate administrative proceedings.
The above two (2) provisions relied upon by petitioner does not require the
Islamic Bank [AIIBP] to promulgate rules of procedure before administrative
discipline may be imposed upon its employees. The internal rules of
procedures ordained to be adopted by the Board refers to that necessary for
the conduct of its Islamic banking business and all matters related to
"personnel organization, office functions and salary administration." On the
contrary, Section 26 of RA 6848 gives the Board of Directors of the Islamic
Bank the "broadest powers to manage the Islamic Bank." This grant of broad
powers would be an idle ceremony if it would be powerless to discipline its
employees.

The second assignment of error must likewise fail. The issue is raised for the
first time via this petition for certiorari. Petitioner submitted himself to the
jurisdiction of the CSC. Although he could have raised the alleged lack of
jurisdiction in his Motion for Reconsideration of Resolution No. 94-4483 of the
CSC, he did not do so. By filing the Motion for Reconsideration, he is estopped
from denying the CSCs jurisdiction over him, as it is settled rule that a party
who asks for an affirmative relief cannot later on impugn the action of the
tribunal as without jurisdiction after an adverse result was meted to him.
Although jurisdiction over the subject matter of a case may be objected to at
any stage of the proceedings even on appeal, this particular rule, however,
means that jurisdictional issues in a case can be raised only during the
proceedings in said case and during the appeal of said case (Aragon v. Court
of Appeals, 270 SCRA 603). The case at bar is a petition [for] certiorari and not
an appeal.
But even on the merits the argument must falter. Item No. 1 of CSC Resolution
No. 93-2387 dated 29 June 1993, provides:
Decisions in administrative cases involving officials and employees of the civil
service appealable to the Commission pursuant to Section 47 of Book V of the
Code (i.e., Administrative Code of 1987) including personnel actions such as
contested appointments shall now be appealed directly to the Commission and
not to the MSPB.
In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it was
categorically held:
. . . The functions of the MSPB relating to the determination of administrative
disciplinary cases were, in other words, re-allocated to the Commission itself.
Be that as it may, "(i)t is hornbook doctrine that in order `(t)o ascertain whether
a court (in this case, administrative agency) has jurisdiction or not, the
provisions of the law should be inquired into. Furthermore, `the jurisdiction of
the court must appear clearly from the statute law or it will not be held to
exist."(Azarcon v. Sandiganbayan, 268 SCRA 747, 757) From the provision of
law abovecited, the Civil Service Commission clearly has jurisdiction over the
Administrative Case against petitioner.
Anent the third assignment of error, we likewise do not find merit in petitioners
proposition that he should not be liable, as in the first place, he was not
qualified to perform the functions of appraiser/investigator because he lacked
the necessary training and expertise, and therefore, should not have been
found dishonest by the Board of Directors of Islamic Bank [AIIBP] and the
CSC. Petitioner himself admits that the position of appraiser/inspector is "one
of the most serious [and] sensitive job in the banking operations." He should
have been aware that accepting such a designation, he is obliged to perform

the task at hand by the exercise of more than ordinary prudence. As

appraiser/investigator, he is expected, among others, to check the authenticity
of the documents presented by the borrower by comparing them with the
originals on file with the proper government office. He should have made it
sure that the technical descriptions in the location plan on file with the Bureau
of Lands of Marikina, jibe with that indicated in the TCT of the collateral offered
by CAMEC, and that the mortgage in favor of the Islamic Bank was duly
annotated at the back of the copy of the TCT kept by the Register of Deeds of
Marikina. This, petitioner failed to do, for which he must be held liable. That he
did not profit from his false report is of no moment. Neither the fact that it was
not deliberate or willful, detracts from the nature of the act as dishonest. What
is apparent is he stated something to be a fact, when he really was not sure
that it was so.
Wherefore, above premises considered, the instant Petition is DISMISSED,
and the assailed Resolutions of the Civil Service Commission are hereby
AFFIRMED.
On 24 March 1999, Sawadjaans counsel notified the court a quo of his change
11
of address, but apparently neglected to notify his client of this fact. Thus, on
12
23 July 1999, Sawadjaan, by himself, filed a Motion for New Trial in the Court
of Appeals based on the following grounds: fraud, accident, mistake or
excusable negligence and newly discovered evidence. He claimed that he had
recently discovered that at the time his employment was terminated, the AIIBP
13
had not yet adopted its corporate by-laws. He attached a Certification by the
Securities and Exchange Commission (SEC) that it was only on 27 May 1992
that the AIIBP submitted its draft by-laws to the SEC, and that its registration
was being held in abeyance pending certain corrections being made thereon.
Sawadjaan argued that since the AIIBP failed to file its by-laws within 60 days
from the passage of Rep. Act No. 6848, as required by Sec. 51 of the said law,
the bank and its stockholders had "already forfeited its franchise or charter,
14
including its license to exist and operate as a corporation," and thus no longer
have "the legal standing and personality to initiate an administrative case."
Sawadjaans counsel subsequently adopted his motion, but requested that it
15
be treated as a motion for reconsideration. This motion was denied by the
16
court a quo in its Resolution of 15 December 1999.
Still disheartened, Sawadjaan filed the present petition for certiorari under Rule
65 of the Rules of Court challenging the above Decision and Resolution of the
Court of Appeals on the ground that the court a quo erred: i) in ignoring the
facts and evidences that the alleged Islamic Bank has no valid by-laws; ii) in
ignoring the facts and evidences that the Islamic Bank lost its juridical
personality as a corporation on 16 April 1990; iii) in ignoring the facts and
evidences that the alleged Islamic Bank and its alleged Board of Directors
have no jurisdiction to act in the manner they did in the absence of a valid bylaws; iv) in not correcting the acts of the Civil Service Commission who

erroneously rendered the assailed Resolutions No. 94-4483 and No. 95-2754
as a result of fraud, falsification and/or misrepresentations committed by
Farouk A. Carpizo and his group, including Roberto F. de Ocampo; v) in
affirming an unconscionably harsh and/or excessive penalty; and vi) in failing
to consider newly discovered evidence and reverse its decision accordingly.
Subsequently, petitioner Sawadjaan filed an "Ex-parte Urgent Motion for
Additional Extension of Time to File a Reply (to the Comments of Respondent
17
Al-Amanah Investment Bank of the Philippines), Reply (to Respondents
18
Consolidated Comment,)
and Reply (to the Alleged Comments of
19
Respondent Al-Amanah Islamic Bank of the Philippines)." On 13 October
2000, he informed this Court that he had terminated his lawyers services, and,
20
by himself, prepared and filed the following: 1) Motion for New Trial; 2)
Motion to Declare Respondents in Default and/or Having Waived their Rights
21
to Interpose Objection to Petitioners Motion for New Trial; 3) Ex-Parte Urgent
Motions to Punish Attorneys Amado D. Valdez, Elpidio J. Vega, Alda G. Reyes,
Dominador R. Isidoro, Jr., and Odilon A. Diaz for Being in Contempt of Court &
to Inhibit them from Appearing in this Case Until they Can Present Valid
22
Evidence of Legal Authority; 4) Opposition/Reply (to Respondent AIIBPs
23
Alleged Comment); 5) Ex-Parte Urgent Motion to Punish Atty. Reynaldo A.
Pineda for Contempt of Court and the Issuance of a Commitment
24
Order/Warrant for His Arrest; 6) Reply/Opposition (To the Formal Notice of
Withdrawal of Undersigned Counsel as Legal Counsel for the Respondent
Islamic Bank with Opposition to Petitioners Motion to Punish Undersigned
25
Counsel for Contempt of Court for the Issuance of a Warrant of Arrest); 7)
26
Memorandum for Petitioner; 8) Opposition to SolGens Motion for Clarification
with Motion for Default and/or Waiver of Respondents to File their
27
Memorandum; 9) Motion for Contempt of Court and Inhibition/Disqualification
with Opposition to OGCCs Motion for Extension of Time to File
28
29
Memorandum; 10) Motion for Enforcement (In Defense of the Rule of Law);
11) Motion and Opposition (Motion to Punish OGCCs Attorneys Amado D.
Valdez, Efren B. Gonzales, Alda G. Reyes, Odilon A. Diaz and Dominador R.
Isidoro, Jr., for Contempt of Court and the Issuance of a Warrant for their
Arrest; and Opposition to their Alleged "Manifestation and Motion" Dated
30
February 5, 2002); 12) Motion for Reconsideration of Item (a) of Resolution
31
dated 5 February 2002 with Supplemental Motion for Contempt of Court; 13)
32
Motion for Reconsideration of Portion of Resolution Dated 12 March 2002;
14) Ex-Parte Urgent Motion for Extension of Time to File Reply Memorandum
33
(To: CSC and AIIBPs Memorandum); 15) Reply Memorandum (To: CSCs
Memorandum) With Ex-Parte Urgent Motion for Additional Extension of time to
34
File Reply Memorandum (To: AIIBPs Memorandum);
and 16) Reply
35
Memorandum (To: OGCCs Memorandum for Respondent AIIBP).
Petitioners efforts are unavailing, and we deny his petition for its procedural
and substantive flaws.

The general rule is that the remedy to obtain reversal or modification of the
judgment on the merits is appeal. This is true even if the error, or one of the
errors, ascribed to the court rendering the judgment is its lack of jurisdiction
over the subject matter, or the exercise of power in excess thereof, or grave
36
abuse of discretion in the findings of fact or of law set out in the decision.
The records show that petitioners counsel received the Resolution of the Court
of Appeals denying his motion for reconsideration on 27 December 1999. The
fifteen day reglamentary period to appeal under Rule 45 of the Rules of Court
therefore lapsed on 11 January 2000. On 23 February 2000, over a month
after receipt of the resolution denying his motion for reconsideration, the
petitioner filed his petition for certiorari under Rule 65.
It is settled that a special civil action for certiorari will not lie as a substitute for
37
38
the lost remedy of appeal, and though there are instances where the
extraordinary remedy of certiorari may be resorted to despite the availability of
39
an appeal, we find no special reasons for making out an exception in this
case.
Even if we were to overlook this fact in the broader interests of justice and treat
40
this as a special civil action for certiorari under Rule 65, the petition would
nevertheless be dismissed for failure of the petitioner to show grave abuse of
discretion. Petitioners recurrent argument, tenuous at its very best, is
premised on the fact that since respondent AIIBP failed to file its by-laws within
the designated 60 days from the effectivity of Rep. Act No. 6848, all
proceedings initiated by AIIBP and all actions resulting therefrom are a patent
nullity. Or, in his words, the AIIBP and its officers and Board of Directors,
. . . [H]ave no legal authority nor jurisdiction to manage much less operate the
Islamic Bank, file administrative charges and investigate petitioner in the
manner they did and allegedly passed Board Resolution No. 2309 on
December 13, 1993 which is null and void for lack of an (sic) authorized and
valid by-laws. The CIVIL SERVICE COMMISSION was therefore affirming,
erroneously, a null and void "Resolution No. 2309 dated December 13, 1993 of
the Board of Directors of Al-Amanah Islamic Investment Bank of the
Philippines" in CSC Resolution No. 94-4483 dated August 11, 1994. A motion
for reconsideration thereof was denied by the CSC in its Resolution No. 952754 dated April 11, 1995. Both acts/resolutions of the CSC are erroneous,
resulting from fraud, falsifications and misrepresentations of the alleged
Chairman and CEO Roberto F. de Ocampo and the alleged Director Farouk A.
41
Carpizo and his group at the alleged Islamic Bank.
Nowhere in petitioners voluminous pleadings is there a showing that the court
a quo committed grave abuse of discretion amounting to lack or excess of
jurisdiction reversible by a petition for certiorari. Petitioner already raised the
question of AIIBPs corporate existence and lack of jurisdiction in his Motion for
New Trial/Motion for Reconsideration of 27 May 1997 and was denied by the

Court of Appeals. Despite the volume of pleadings he has submitted thus far,
he has added nothing substantial to his arguments.
The AIIBP was created by Rep. Act No. 6848. It has a main office where it
conducts business, has shareholders, corporate officers, a board of directors,
assets, and personnel. It is, in fact, here represented by the Office of the
Government Corporate Counsel, "the principal law office of government-owned
42
corporations, one of which is respondent bank." At the very least, by its
failure to submit its by-laws on time, the AIIBP may be considered a de facto
43
corporation whose right to exercise corporate powers may not be inquired
44
into collaterally in any private suit to which such corporations may be a party.
Moreover, a corporation which has failed to file its by-laws within the
prescribed period does not ipso facto lose its powers as such. The SEC Rules
45
on Suspension/Revocation of the Certificate of Registration of Corporations,
details the procedures and remedies that may be availed of before an order of
revocation can be issued. There is no showing that such a procedure has been
initiated in this case.
In any case, petitioners argument is irrelevant because this case is not a
corporate controversy, but a labor dispute; and it is an employers basic right to
freely select or discharge its employees, if only as a measure of self-protection
46
against acts inimical to its interest. Regardless of whether AIIBP is a
corporation, a partnership, a sole proprietorship, or a sari-sari store, it is an
undisputed fact that AIIBP is the petitioners employer. AIIBP chose to retain
his services during its reorganization, controlled the means and methods by
which his work was to be performed, paid his wages, and, eventually,
47
terminated his services.
And though he has had ample opportunity to do so, the petitioner has not
alleged that he is anything other than an employee of AIIBP. He has neither
claimed, nor shown, that he is a stockholder or an officer of the corporation.
Having accepted employment from AIIBP, and rendered his services to the
said bank, received his salary, and accepted the promotion given him, it is now
too late in the day for petitioner to question its existence and its power to
terminate his services. One who assumes an obligation to an ostensible
corporation as such, cannot resist performance thereof on the ground that
48
there was in fact no corporation. 1avvphi1
Even if we were to consider the facts behind petitioner Sawadjaans dismissal
from service, we would be hard pressed to find error in the decision of the
AIIBP.
As appraiser/investigator, the petitioner was expected to conduct an ocular
inspection of the properties offered by CAMEC as collaterals and check the
copies of the certificates of title against those on file with the Registry of

Deeds. Not only did he fail to conduct these routine checks, but he also
deliberately misrepresented in his appraisal report that after reviewing the
documents and conducting a site inspection, he found the CAMEC loan
application to be in order. Despite the number of pleadings he has filed, he has
failed to offer an alternative explanation for his actions.

This notwithstanding, respondent cannot escape liability. As adverted to

earlier, his failure to perform his official duties resulted to the prejudice and
substantial damage to the ISLAMIC BANK for which he should be held liable
for the administrative offense of CONDUCT PREJUDICIAL TO THE BEST
49
INTEREST OF THE SERVICE.

When he was informed of the charges against him and directed to appear and
present his side on the matter, the petitioner sent instead a memorandum
questioning the fairness and impartiality of the members of the investigating
committee and refusing to recognize their jurisdiction over him. Nevertheless,
the investigating committee rescheduled the hearing to give the petitioner
another chance, but he still refused to appear before it.

From the foregoing, we find that the CSC and the court a quo committed no
grave abuse of discretion when they sustained Sawadjaans dismissal from
service. Grave abuse of discretion implies such capricious and whimsical
exercise of judgment as equivalent to lack of jurisdiction, or, in other words,
where the power is exercised in an arbitrary or despotic manner by reason of
passion or personal hostility, and it must be so patent and gross as to amount
to an evasion of positive duty or to a virtual refusal to perform the duty enjoined
50
or to act at all in contemplation of law. The records show that the
respondents did none of these; they acted in accordance with the law.

Thereafter, witnesses were presented, and a decision was rendered finding

him guilty of dishonesty and dismissing him from service. He sought a
reconsideration of this decision and the same committee whose impartiality he
questioned reduced their recommended penalty to suspension for six months
and one day. The board of directors, however, opted to dismiss him from
service.
On appeal to the CSC, the Commission found that Sawadjaans failure to
perform his official duties greatly prejudiced the AIIBP, for which he should be
held accountable. It held that:
. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was remiss in
the performance of his duties as appraiser/inspector. Had respondent
performed his duties as appraiser/inspector, he could have easily noticed that
the property located at Balintawak, Caloocan City covered by TCT No. C52576 and which is one of the properties offered as collateral by CAMEC is
encumbered to Divina Pablico. Had respondent reflected such fact in his
appraisal/inspection report on said property the ISLAMIC BANK would not
have approved CAMECs loan of P500,000.00 in 1987 and CAMECs P5
Million loan in 1988, respondent knowing fully well the Banks policy of not
accepting encumbered properties as collateral.
Respondent SAWADJAANs reprehensible act is further aggravated when he
failed to check and verify from the Registry of Deeds of Marikina the
authenticity of the property located at Mayamot, Antipolo, Rizal covered by
TCT No. N-130671 and which is one of the properties offered as collateral by
CAMEC for its P5 Million loan in 1988. If he only visited and verified with the
Register of Deeds of Marikina the authenticity of TCT No. N-130671 he could
have easily discovered that TCT No. N-130671 is fake and the property
described therein non-existent.
...

WHEREFORE, the petition is DISMISSED. The Decision of the Court of

Appeals of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754
of the Civil Service Commission, and its Resolution of 15 December 1999 are
hereby affirmed. Costs against the petitioner.
SO ORDERED.
Davide, Jr., C.J., Panganiban, Quisumbing, Ynares-Santiago, SandovalGutierrez, Carpio, Austria-Martinez, Corona, Carpio-Morales, Callejo, Sr.,
Azcuna, Tinga, and Garcia, JJ., concur.
Puno, J., on official leave.

G.R. No. 176579

June 28, 2011

WILSON P. GAMBOA, Petitioner,

vs.
FINANCE SECRETARY MARGARITO B. TEVES, FINANCE
UNDERSECRETARY JOHN P. SEVILLA, AND COMMISSIONER RICARDO
ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT (PCGG) IN THEIR CAPACITIES AS CHAIR AND
MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL,
CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS
CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC.,
CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING
DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L.
NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY,
CHAIR FE BARIN OF THE SECURITIES EXCHANGE COMMISSION, and
PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE,
Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioners-in-Intervention.
DECISION
CARPIO, J.:
The Case
This is an original petition for prohibition, injunction, declaratory relief and
declaration of nullity of the sale of shares of stock of Philippine
Telecommunications Investment Corporation (PTIC) by the government of the
Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an
affiliate of First Pacific Company Limited (First Pacific).

The Antecedents
The facts, according to petitioner Wilson P. Gamboa, a stockholder of
1
Philippine Long Distance Telephone Company (PLDT), are as follows:
On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which
granted PLDT a franchise and the right to engage in telecommunications
business. In 1969, General Telephone and Electronics Corporation (GTE), an
American company and a major PLDT stockholder, sold 26 percent of the
outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc.
(PHI) was incorporated by several persons, including Roland Gapud and Jose
Campos, Jr. Subsequently, PHI became the owner of 111,415 shares of stock
of PTIC by virtue of three Deeds of Assignment executed by PTIC stockholders
Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares of stock
of PTIC held by PHI were sequestered by the Presidential Commission on
Good Government (PCGG). The 111,415 PTIC shares, which represent about
46.125 percent of the outstanding capital stock of PTIC, were later declared by
2
this Court to be owned by the Republic of the Philippines.
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment
firm, acquired the remaining 54 percent of the outstanding capital stock of
PTIC. On 20 November 2006, the Inter-Agency Privatization Council (IPC) of
the Philippine Government announced that it would sell the 111,415 PTIC
shares, or 46.125 percent of the outstanding capital stock of PTIC, through a
public bidding to be conducted on 4 December 2006. Subsequently, the public
bidding was reset to 8 December 2006, and only two bidders, Parallax Venture
Fund XXVII (Parallax) and Pan-Asia Presidio Capital, submitted their bids.
Parallax won with a bid of P25.6 billion or US$510 million.
Thereafter, First Pacific announced that it would exercise its right of first refusal
as a PTIC stockholder and buy the 111,415 PTIC shares by matching the bid
price of Parallax. However, First Pacific failed to do so by the 1 February 2007
deadline set by IPC and instead, yielded its right to PTIC itself which was then
given by IPC until 2 March 2007 to buy the PTIC shares. On 14 February 2007,
First Pacific, through its subsidiary, MPAH, entered into a Conditional Sale and
Purchase Agreement of the 111,415 PTIC shares, or 46.125 percent of the
outstanding capital stock of PTIC, with the Philippine Government for the price
of P25,217,556,000 or US$510,580,189. The sale was completed on 28
February 2007.
Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of
46.125 percent of PTIC shares is actually an indirect sale of 12 million shares
or about 6.3 percent of the outstanding common shares of PLDT. With the
sale, First Pacifics common shareholdings in PLDT increased from 30.7
percent to 37 percent, thereby increasing the common shareholdings of
foreigners in PLDT to about 81.47 percent. This violates Section 11, Article

XII of the 1987 Philippine Constitution which limits foreign ownership of the
3
capital of a public utility to not more than 40 percent.
On the other hand, public respondents Finance Secretary Margarito B. Teves,
Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede
allege the following relevant facts:
On 9 November 1967, PTIC was incorporated and had since engaged in the
business of investment holdings. PTIC held 26,034,263 PLDT common shares,
or 13.847 percent of the total PLDT outstanding common shares. PHI, on the
other hand, was incorporated in 1977, and became the owner of 111,415 PTIC
shares or 46.125 percent of the outstanding capital stock of PTIC by virtue of
three Deeds of Assignment executed by Ramon Cojuangco and Luis Tirso
Rivilla. In 1986, the 111,415 PTIC shares held by PHI were sequestered by the
PCGG, and subsequently declared by this Court as part of the ill-gotten wealth
of former President Ferdinand Marcos. The sequestered PTIC shares were
reconveyed to the Republic of the Philippines in accordance with this Courts
4
decision which became final and executory on 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares, which
represent 6.4 percent of the outstanding common shares of stock of PLDT, and
designated the Inter-Agency Privatization Council (IPC), composed of the
Department of Finance and the PCGG, as the disposing entity. An invitation to
bid was published in seven different newspapers from 13 to 24 November
2006. On 20 November 2006, a pre-bid conference was held, and the original
deadline for bidding scheduled on 4 December 2006 was reset to 8 December
2006. The extension was published in nine different newspapers.
During the 8 December 2006 bidding, Parallax Capital Management LP
emerged as the highest bidder with a bid of P25,217,556,000. The government
notified First Pacific, the majority owner of PTIC shares, of the bidding results
and gave First Pacific until 1 February 2007 to exercise its right of first refusal
in accordance with PTICs Articles of Incorporation. First Pacific announced its
intention to match Parallaxs bid.
On 31 January 2007, the House of Representatives (HR) Committee on Good
Government conducted a public hearing on the particulars of the then
impending sale of the 111,415 PTIC shares. Respondents Teves and Sevilla
were among those who attended the public hearing. The HR Committee
Report No. 2270 concluded that: (a) the auction of the governments 111,415
PTIC shares bore due diligence, transparency and conformity with existing
legal procedures; and (b) First Pacifics intended acquisition of the
governments 111,415 PTIC shares resulting in First Pacifics 100%
ownership of PTIC will not violate the 40 percent constitutional limit on
foreign ownership of a public utility since PTIC holds only 13.847 percent
5
of the total outstanding common shares of PLDT. On 28 February 2007,
First Pacific completed the acquisition of the 111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC
conducted a public bidding for the sale of 111,415 PTIC shares or 46 percent
of the outstanding capital stock of PTIC (the remaining 54 percent of PTIC
shares was already owned by First Pacific and its affiliates); (b) Parallax
offered the highest bid amounting to P25,217,556,000; (c) pursuant to the right
of first refusal in favor of PTIC and its shareholders granted in PTICs Articles
of Incorporation, MPAH, a First Pacific affiliate, exercised its right of first refusal
by matching the highest bid offered for PTIC shares on 13 February 2007; and
(d) on 28 February 2007, the sale was consummated when MPAH paid IPC
P25,217,556,000 and the government delivered the certificates for the 111,415
PTIC shares. Respondent Pangilinan denies the other allegations of facts of
petitioner.
On 28 February 2007, petitioner filed the instant petition for prohibition,
injunction, declaratory relief, and declaration of nullity of sale of the 111,415
PTIC shares. Petitioner claims, among others, that the sale of the 111,415
PTIC shares would result in an increase in First Pacifics common
shareholdings in PLDT from 30.7 percent to 37 percent, and this, combined
with Japanese NTT DoCoMos common shareholdings in PLDT, would result
to a total foreign common shareholdings in PLDT of 51.56 percent which is
6
over the 40 percent constitutional limit. Petitioner asserts:
If and when the sale is completed, First Pacifics equity in PLDT will go up from
30.7 percent to 37.0 percent of its common or voting- stockholdings, x x x.
Hence, the consummation of the sale will put the two largest foreign investors
in PLDT First Pacific and Japans NTT DoCoMo, which is the worlds largest
wireless telecommunications firm, owning 51.56 percent of PLDT common
equity. x x x With the completion of the sale, data culled from the official
website of the New York Stock Exchange (www.nyse.com) showed that those
foreign entities, which own at least five percent of common equity, will
collectively own 81.47 percent of PLDTs common equity. x x x

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for
Leave to Intervene and Admit Attached Petition-in-Intervention. In the
Resolution of 28 August 2007, the Court granted the motion and noted the
Petition-in-Intervention.
Petitioners-in-intervention "join petitioner Wilson Gamboa x x x in seeking,
among others, to enjoin and/or nullify the sale by respondents of the 111,415
PTIC shares to First Pacific or assignee." Petitioners-in-intervention claim that,
as PLDT subscribers, they have a "stake in the outcome of the controversy x x
x where the Philippine Government is completing the sale of government
owned assets in [PLDT], unquestionably a public utility, in violation of the
nationality restrictions of the Philippine Constitution."

The Issue
This Court is not a trier of facts. Factual questions such as those raised by
9
petitioner, which indisputably demand a thorough examination of the evidence
of the parties, are generally beyond this Courts jurisdiction. Adhering to this
well-settled principle, the Court shall confine the resolution of the instant
controversy solely on the threshold and purely legal issue of whether the
term "capital" in Section 11, Article XII of the Constitution refers to the total
common shares only or to the total outstanding capital stock (combined total of
common and non-voting preferred shares) of PLDT, a public utility.
The Ruling of the Court
The petition is partly meritorious.

x x x as the annual disclosure reports, also referred to as Form 20-K reports x

x x which PLDT submitted to the New York Stock Exchange for the period
2003-2005, revealed that First Pacific and several other foreign entities
breached the constitutional limit of 40 percent ownership as early as 2003. x x
7
x"
Petitioner raises the following issues: (1) whether the consummation of the
then impending sale of 111,415 PTIC shares to First Pacific violates the
constitutional limit on foreign ownership of a public utility; (2) whether public
respondents committed grave abuse of discretion in allowing the sale of the
111,415 PTIC shares to First Pacific; and (3) whether the sale of common
shares to foreigners in excess of 40 percent of the entire subscribed common
capital stock violates the constitutional limit on foreign ownership of a public
8
utility.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies
petitioner seeks, only the petition for prohibition is within the original jurisdiction
of this court, which however is not exclusive but is concurrent with the Regional
10
Trial Court and the Court of Appeals. The actions for declaratory relief,
injunction, and annulment of sale are not embraced within the original
jurisdiction of the Supreme Court. On this ground alone, the petition could have
been dismissed outright.
11

While direct resort to this Court may be justified in a petition for prohibition,
the Court shall nevertheless refrain from discussing the grounds in support of
the petition for prohibition since on 28 February 2007, the questioned sale was

consummated when MPAH paid IPC P25,217,556,000 and the government

delivered the certificates for the 111,415 PTIC shares.

questions that should be resolved, it may be treated as one for

15
mandamus. (Emphasis supplied)

However, since the threshold and purely legal issue on the definition of the
term "capital" in Section 11, Article XII of the Constitution has far-reaching
implications to the national economy, the Court treats the petition for
12
declaratory relief as one for mandamus.

In the present case, petitioner seeks primarily the interpretation of the term
"capital" in Section 11, Article XII of the Constitution. He prays that this Court
declare that the term "capital" refers to common shares only, and that such
shares constitute "the sole basis in determining foreign equity in a public
utility." Petitioner further asks this Court to declare any ruling inconsistent with
such interpretation unconstitutional.

13

In Salvacion v. Central Bank of the Philippines, the Court treated the petition
for declaratory relief as one for mandamus considering the grave injustice that
would result in the interpretation of a banking law. In that case, which involved
the crime of rape committed by a foreign tourist against a Filipino minor and
the execution of the final judgment in the civil case for damages on the tourists
dollar deposit with a local bank, the Court declared Section 113 of Central
Bank Circular No. 960, exempting foreign currency deposits from attachment,
garnishment or any other order or process of any court, inapplicable due to the
peculiar circumstances of the case. The Court held that "injustice would result
especially to a citizen aggrieved by a foreign guest like accused x x x" that
would "negate Article 10 of the Civil Code which provides that in case of doubt
in the interpretation or application of laws, it is presumed that the lawmaking
body intended right and justice to prevail." The Court therefore required
respondents Central Bank of the Philippines, the local bank, and the accused
to comply with the writ of execution issued in the civil case for damages and to
release the dollar deposit of the accused to satisfy the judgment.
14

In Alliance of Government Workers v. Minister of Labor, the Court similarly

brushed aside the procedural infirmity of the petition for declaratory relief and
treated the same as one for mandamus. In Alliance, the issue was whether the
government unlawfully excluded petitioners, who were government employees,
from the enjoyment of rights to which they were entitled under the law.
Specifically, the question was: "Are the branches, agencies, subdivisions, and
instrumentalities of the Government, including government owned or controlled
corporations included among the four employers under Presidential Decree
No. 851 which are required to pay their employees x x x a thirteenth (13th)
month pay x x x ?" The Constitutional principle involved therein affected all
government employees, clearly justifying a relaxation of the technical rules of
procedure, and certainly requiring the interpretation of the assailed presidential
decree.
In short, it is well-settled that this Court may treat a petition for declaratory
relief as one for mandamus if the issue involved has far-reaching implications.
As this Court held in Salvacion:
The Court has no original and exclusive jurisdiction over a petition for
declaratory relief. However, exceptions to this rule have been recognized.
Thus, where the petition has far-reaching implications and raises

The interpretation of the term "capital" in Section 11, Article XII of the
Constitution has far-reaching implications to the national economy. In fact, a
resolution of this issue will determine whether Filipinos are masters, or second
class citizens, in their own country. What is at stake here is whether Filipinos or
foreigners will have effective control of the national economy. Indeed, if ever
there is a legal issue that has far-reaching implications to the entire nation, and
to future generations of Filipinos, it is the threshhold legal issue presented in
this case.
The Court first encountered the issue on the definition of the term "capital" in
Section 11, Article XII of the Constitution in the case of Fernandez v.
16
Cojuangco, docketed as G.R. No. 157360. That case involved the same
public utility (PLDT) and substantially the same private respondents. Despite
the importance and novelty of the constitutional issue raised therein and
despite the fact that the petition involved a purely legal question, the Court
declined to resolve the case on the merits, and instead denied the same for
17
disregarding the hierarchy of courts. There, petitioner Fernandez assailed on
a pure question of law the Regional Trial Courts Decision of 21 February 2003
via a petition for review under Rule 45. The Courts Resolution, denying the
petition, became final on 21 December 2004.
The instant petition therefore presents the Court with another opportunity to
finally settle this purely legal issue which is of transcendental importance to
the national economy and a fundamental requirement to a faithful adherence to
our Constitution. The Court must forthwith seize such opportunity, not only for
the benefit of the litigants, but more significantly for the benefit of the entire
Filipino people, to ensure, in the words of the Constitution, "a self-reliant and
18
independent national economy effectively controlled by Filipinos." Besides,
in the light of vague and confusing positions taken by government agencies on
this purely legal issue, present and future foreign investors in this country
deserve, as a matter of basic fairness, a categorical ruling from this Court on
the extent of their participation in the capital of public utilities and other
nationalized businesses.
Despite its far-reaching implications to the national economy, this purely legal
issue has remained unresolved for over 75 years since the 1935 Constitution.
There is no reason for this Court to evade this ever recurring fundamental

issue and delay again defining the term "capital," which appears not only in
Section 11, Article XII of the Constitution, but also in Section 2, Article XII on
co-production and joint venture agreements for the development of our natural
19
20
resources, in Section 7, Article XII on ownership of private lands, in Section
21
10, Article XII on the reservation of certain investments to Filipino citizens, in
22
Section 4(2), Article XIV on the ownership of educational institutions, and in
23
Section 11(2), Article XVI on the ownership of advertising companies.
Petitioner has locus standi
There is no dispute that petitioner is a stockholder of PLDT. As such, he has
the right to question the subject sale, which he claims to violate the nationality
requirement prescribed in Section 11, Article XII of the Constitution. If the sale
indeed violates the Constitution, then there is a possibility that PLDTs
franchise could be revoked, a dire consequence directly affecting petitioners
interest as a stockholder.
More importantly, there is no question that the instant petition raises matters of
transcendental importance to the public. The fundamental and threshold legal
issue in this case, involving the national economy and the economic welfare of
the Filipino people, far outweighs any perceived impediment in the legal
personality of the petitioner to bring this action.
24

In Chavez v. PCGG, the Court upheld the right of a citizen to bring a suit on
matters of transcendental importance to the public, thus:
In Taada v. Tuvera, the Court asserted that when the issue concerns a
public right and the object of mandamus is to obtain the enforcement of a
public duty, the people are regarded as the real parties in interest; and
because it is sufficient that petitioner is a citizen and as such is
interested in the execution of the laws, he need not show that he has any
legal or special interest in the result of the action. In the aforesaid case,
the petitioners sought to enforce their right to be informed on matters of public
concern, a right then recognized in Section 6, Article IV of the 1973
Constitution, in connection with the rule that laws in order to be valid and
enforceable must be published in the Official Gazette or otherwise effectively
promulgated. In ruling for the petitioners legal standing, the Court declared
that the right they sought to be enforced is a public right recognized by no less
than the fundamental law of the land.
Legaspi v. Civil Service Commission, while reiterating Taada, further declared
that when a mandamus proceeding involves the assertion of a public
right, the requirement of personal interest is satisfied by the mere fact
that petitioner is a citizen and, therefore, part of the general public
which possesses the right.

Further, in Albano v. Reyes, we said that while expenditure of public funds may
not have been involved under the questioned contract for the development,
management and operation of the Manila International Container Terminal,
public interest [was] definitely involved considering the important role
[of the subject contract] . . . in the economic development of the country
and the magnitude of the financial consideration involved. We concluded
that, as a consequence, the disclosure provision in the Constitution would
constitute sufficient authority for upholding the petitioners standing. (Emphasis
supplied)
Clearly, since the instant petition, brought by a citizen, involves matters of
transcendental public importance, the petitioner has the requisite locus standi.
Definition of the Term "Capital" in
Section 11, Article XII of the 1987 Constitution
Section 11, Article XII (National Economy and Patrimony) of the 1987
Constitution mandates the Filipinization of public utilities, to wit:
Section 11. No franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws
of the Philippines, at least sixty per centum of whose capital is owned by
such citizens; nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. Neither shall any
such franchise or right be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the common
good so requires. The State shall encourage equity participation in public
utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers
of such corporation or association must be citizens of the Philippines.
(Emphasis supplied)
The above provision substantially reiterates Section 5, Article XIV of the 1973
Constitution, thus:
Section 5. No franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws
of the Philippines at least sixty per centum of the capital of which is
owned by such citizens, nor shall such franchise, certificate, or authorization
be exclusive in character or for a longer period than fifty years. Neither shall
any such franchise or right be granted except under the condition that it shall
be subject to amendment, alteration, or repeal by the National Assembly when
the public interest so requires. The State shall encourage equity participation in

public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their
proportionate share in the capital thereof. (Emphasis supplied)
The foregoing provision in the 1973 Constitution reproduced Section 8, Article
XIV of the 1935 Constitution, viz:
Section 8. No franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or other entities organized under the laws
of the Philippines sixty per centum of the capital of which is owned by
citizens of the Philippines, nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than fifty years.
No franchise or right shall be granted to any individual, firm, or corporation,
except under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the public interest so requires. (Emphasis
supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional
Commission, reminds us that the Filipinization provision in the 1987
Constitution is one of the products of the spirit of nationalism which gripped the
25
1935 Constitutional Convention. The 1987 Constitution "provides for the
Filipinization of public utilities by requiring that any form of authorization for the
operation of public utilities should be granted only to citizens of the Philippines
or to corporations or associations organized under the laws of the Philippines
at least sixty per centum of whose capital is owned by such citizens. The
provision is [an express] recognition of the sensitive and vital position of
26
public utilities both in the national economy and for national security."
The evident purpose of the citizenship requirement is to prevent aliens from
assuming control of public utilities, which may be inimical to the national
27
interest. This specific provision explicitly reserves to Filipino citizens control
of public utilities, pursuant to an overriding economic goal of the 1987
28
Constitution: to "conserve and develop our patrimony" and ensure "a selfreliant and independent national economy effectively controlled by
29
Filipinos."
Any citizen or juridical entity desiring to operate a public utility must therefore
meet the minimum nationality requirement prescribed in Section 11, Article XII
of the Constitution. Hence, for a corporation to be granted authority to operate
a public utility, at least 60 percent of its "capital" must be owned by Filipino
citizens.
The crux of the controversy is the definition of the term "capital." Does the
term "capital" in Section 11, Article XII of the Constitution refer to common
shares or to the total outstanding capital stock (combined total of common and
non-voting preferred shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic

public utilities refers only to common shares because such shares are entitled
to vote and it is through voting that control over a corporation is exercised.
Petitioner posits that the term "capital" in Section 11, Article XII of the
Constitution refers to "the ownership of common capital stock subscribed and
outstanding, which class of shares alone, under the corporate set-up of PLDT,
can vote and elect members of the board of directors." It is undisputed that
30
PLDTs non-voting preferred shares are held mostly by Filipino citizens. This
31
arose from Presidential Decree No. 217, issued on 16 June 1973 by then
President Ferdinand Marcos, requiring every applicant of a PLDT telephone
line to subscribe to non-voting preferred shares to pay for the investment cost
32
of installing the telephone line.
Petitioners-in-intervention basically reiterate petitioners arguments and adopt
33
petitioners definition of the term "capital." Petitioners-in-intervention allege
that "the approximate foreign ownership of common capital stock of PLDT x x x
already amounts to at least 63.54% of the total outstanding common stock,"
which means that foreigners exercise significant control over PLDT, patently
violating the 40 percent foreign equity limitation in public utilities prescribed by
the Constitution.
Respondents, on the other hand, do not offer any definition of the term "capital"
in Section 11, Article XII of the Constitution. More importantly, private
respondents Nazareno and Pangilinan of PLDT do not dispute that more than
40 percent of the common shares of PLDT are held by foreigners.
In particular, respondent Nazarenos Memorandum, consisting of 73 pages,
harps mainly on the procedural infirmities of the petition and the supposed
violation of the due process rights of the "affected foreign common
shareholders." Respondent Nazareno does not deny petitioners allegation of
foreigners dominating the common shareholdings of PLDT. Nazareno stressed
mainly that the petition "seeks to divest foreign common shareholders
purportedly exceeding 40% of the total common shareholdings in PLDT
of their ownership over their shares." Thus, "the foreign natural and juridical
34
PLDT shareholders must be impleaded in this suit so that they can be heard."
Essentially, Nazareno invokes denial of due process on behalf of the foreign
common shareholders.
While Nazareno does not introduce any definition of the term "capital," he
states that "among the factual assertions that need to be established to
counter petitioners allegations is the uniform interpretation by
government agencies (such as the SEC), institutions and corporations
(such as the Philippine National Oil Company-Energy Development
Corporation or PNOC-EDC) of including both preferred shares and
common shares in "controlling interest" in view of testing compliance
with the 40% constitutional limitation on foreign ownership in public
35
utilities."

Similarly, respondent Manuel V. Pangilinan does not define the term "capital"
in Section 11, Article XII of the Constitution. Neither does he refute petitioners
claim of foreigners holding more than 40 percent of PLDTs common shares.
Instead, respondent Pangilinan focuses on the procedural flaws of the petition
and the alleged violation of the due process rights of foreigners. Respondent
Pangilinan emphasizes in his Memorandum (1) the absence of this Courts
jurisdiction over the petition; (2) petitioners lack of standing; (3) mootness of
the petition; (4) non-availability of declaratory relief; and (5) the denial of due
process rights. Moreover, respondent Pangilinan alleges that the issue should
be whether "owners of shares in PLDT as well as owners of shares in
companies holding shares in PLDT may be required to relinquish their shares
in PLDT and in those companies without any law requiring them to surrender
their shares and also without notice and trial."
Respondent Pangilinan further asserts that "Section 11, [Article XII of the
Constitution] imposes no nationality requirement on the shareholders of
the utility company as a condition for keeping their shares in the utility
company." According to him, "Section 11 does not authorize taking one
persons property (the shareholders stock in the utility company) on the basis
of another partys alleged failure to satisfy a requirement that is a condition
only for that other partys retention of another piece of property (the utility
36
company being at least 60% Filipino-owned to keep its franchise)."
The OSG, representing public respondents Secretary Margarito Teves,
Undersecretary John P. Sevilla, Commissioner Ricardo Abcede, and Chairman
Fe Barin, is likewise silent on the definition of the term "capital." In its
37
Memorandum dated 24 September 2007, the OSG also limits its discussion
on the supposed procedural defects of the petition, i.e. lack of standing, lack of
jurisdiction, non-inclusion of interested parties, and lack of basis for injunction.
The OSG does not present any definition or interpretation of the term "capital"
in Section 11, Article XII of the Constitution. The OSG contends that "the
petition actually partakes of a collateral attack on PLDTs franchise as a public
utility," which in effect requires a "full-blown trial where all the parties in interest
38
are given their day in court."
Respondent Francisco Ed Lim, impleaded as President and Chief Executive
Officer of the Philippine Stock Exchange (PSE), does not also define the term
"capital" and seeks the dismissal of the petition on the following grounds: (1)
failure to state a cause of action against Lim; (2) the PSE allegedly
implemented its rules and required all listed companies, including PLDT, to
make proper and timely disclosures; and (3) the reliefs prayed for in the
petition would adversely impact the stock market.
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who
claimed to be a stockholder of record of PLDT, contended that the term
"capital" in the 1987 Constitution refers to shares entitled to vote or the
common shares. Fernandez explained thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed by
the Constitution refers to ownership of shares of stock entitled to vote, i.e.,
common shares, considering that it is through voting that control is being
exercised. x x x
Obviously, the intent of the framers of the Constitution in imposing limitations
and restrictions on fully nationalized and partially nationalized activities is for
Filipino nationals to be always in control of the corporation undertaking said
activities. Otherwise, if the Trial Courts ruling upholding respondents
arguments were to be given credence, it would be possible for the ownership
structure of a public utility corporation to be divided into one percent (1%)
common stocks and ninety-nine percent (99%) preferred stocks. Following the
Trial Courts ruling adopting respondents arguments, the common shares can
be owned entirely by foreigners thus creating an absurd situation wherein
foreigners, who are supposed to be minority shareholders, control the public
utility corporation.
xxxx
Thus, the 40% foreign ownership limitation should be interpreted to apply to
both the beneficial ownership and the controlling interest.
xxxx
Clearly, therefore, the forty percent (40%) foreign equity limitation in public
utilities prescribed by the Constitution refers to ownership of shares of stock
entitled to vote, i.e., common shares. Furthermore, ownership of record of
shares will not suffice but it must be shown that the legal and beneficial
ownership rests in the hands of Filipino citizens. Consequently, in the case of
petitioner PLDT, since it is already admitted that the voting interests of
foreigners which would gain entry to petitioner PLDT by the acquisition of
SMART shares through the Questioned Transactions is equivalent to 82.99%,
and the nominee arrangements between the foreign principals and the Filipino
owners is likewise admitted, there is, therefore, a violation of Section 11, Article
XII of the Constitution.
Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited
by the Trial Court to support the proposition that the meaning of the word
"capital" as used in Section 11, Article XII of the Constitution allegedly refers to
the sum total of the shares subscribed and paid-in by the shareholder and it
allegedly is immaterial how the stock is classified, whether as common or
preferred, cannot stand in the face of a clear legislative policy as stated in the
FIA which took effect in 1991 or way after said opinions were rendered, and as
clarified by the above-quoted Amendments. In this regard, suffice it to state
that as between the law and an opinion rendered by an administrative agency,

the law indubitably prevails. Moreover, said Opinions are merely advisory and
cannot prevail over the clear intent of the framers of the Constitution.
In the same vein, the SECs construction of Section 11, Article XII of the
Constitution is at best merely advisory for it is the courts that finally determine
39
what a law means.
On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V.
Pangilinan, Carlos A. Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles
Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L.
Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued that the term
"capital" in Section 11, Article XII of the Constitution includes preferred shares
since the Constitution does not distinguish among classes of stock, thus:
16. The Constitution applies its foreign ownership limitation on the
corporations "capital," without distinction as to classes of shares. x x x
In this connection, the Corporation Code which was already in force at the
time the present (1987) Constitution was drafted defined outstanding capital
stock as follows:
Section 137. Outstanding capital stock defined. The term "outstanding capital
stock", as used in this Code, means the total shares of stock issued under
binding subscription agreements to subscribers or stockholders, whether or not
fully or partially paid, except treasury shares.
Section 137 of the Corporation Code also does not distinguish between
common and preferred shares, nor exclude either class of shares, in
determining the outstanding capital stock (the "capital") of a corporation.
Consequently, petitioners suggestion to reckon PLDTs foreign equity only on
the basis of PLDTs outstanding common shares is without legal basis. The
language of the Constitution should be understood in the sense it has in
common use.
xxxx
17. But even assuming that resort to the proceedings of the Constitutional
Commission is necessary, there is nothing in the Record of the Constitutional
Commission (Vol. III) which petitioner misleadingly cited in the Petition x x x
which supports petitioners view that only common shares should form the
basis for computing a public utilitys foreign equity.
xxxx
18. In addition, the SEC the government agency primarily responsible for
implementing the Corporation Code, and which also has the responsibility of

ensuring compliance with the Constitutions foreign equity restrictions as

regards nationalized activities x x x has categorically ruled that both common
and preferred shares are properly considered in determining outstanding
40
capital stock and the nationality composition thereof.
We agree with petitioner and petitioners-in-intervention. The term "capital" in
Section 11, Article XII of the Constitution refers only to shares of stock entitled
to vote in the election of directors, and thus in the present case only to
41
common shares, and not to the total outstanding capital stock comprising
both common and non-voting preferred shares.
The Corporation Code of the Philippines
preferred, thus:

42

classifies shares as common or

Sec. 6. Classification of shares. - The shares of stock of stock corporations

may be divided into classes or series of shares, or both, any of which classes
or series of shares may have such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued as
"preferred" or "redeemable" shares, unless otherwise provided in this
Code: Provided, further, That there shall always be a class or series of shares
which have complete voting rights. Any or all of the shares or series of shares
may have a par value or have no par value as may be provided for in the
articles of incorporation: Provided, however, That banks, trust companies,
insurance companies, public utilities, and building and loan associations shall
not be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference
in the distribution of the assets of the corporation in case of liquidation and in
the distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code:
Provided, That preferred shares of stock may be issued only with a stated par
value. The Board of Directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and
non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other
share.
Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled
to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the corporate property;

cannot be deprived of the right to vote in any corporate meeting, and any
provision in the articles of incorporation restricting the right of common
47
shareholders to vote is invalid.
Considering that common shares have voting rights which translate to control,
as opposed to preferred shares which usually have no voting rights, the term
"capital" in Section 11, Article XII of the Constitution refers only to common
shares. However, if the preferred shares also have the right to vote in the
election of directors, then the term "capital" shall include such preferred shares
because the right to participate in the control or management of the corporation
is exercised through the right to vote in the election of directors. In short, the
term "capital" in Section 11, Article XII of the Constitution refers only to
shares of stock that can vote in the election of directors.
This interpretation is consistent with the intent of the framers of the Constitution
to place in the hands of Filipino citizens the control and management of public
utilities. As revealed in the deliberations of the Constitutional Commission,
"capital" refers to the voting stock or controlling interest of a corporation, to
wit:

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation
or other corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this Code shall
be deemed to refer only to stocks with voting rights.
Indisputably, one of the rights of a stockholder is the right to participate in the
43
control or management of the corporation. This is exercised through his vote
in the election of directors because it is the board of directors that controls or
44
manages the corporation. In the absence of provisions in the articles of
incorporation denying voting rights to preferred shares, preferred shares have
the same voting rights as common shares. However, preferred shareholders
are often excluded from any control, that is, deprived of the right to vote in the
election of directors and on other matters, on the theory that the preferred
shareholders are merely investors in the corporation for income in the same
45
manner as bondholders. In fact, under the Corporation Code only preferred
46
or redeemable shares can be deprived of the right to vote. Common shares

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino
equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and
2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this question:
"Where do we base the equity requirement, is it on the authorized capital stock,
on the subscribed capital stock, or on the paid-up capital stock of a
corporation"? Will the Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the
team from the UP Law Center who provided us a draft. The phrase that is
contained here which we adopted from the UP draft is "60 percent of
voting stock."
MR. NOLLEDO. That must be based on the subscribed capital stock, because
unless declared delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another corporation, say, a
corporation with 60-40 percent equity invests in another corporation which is

MR. VILLEGAS. Yes, that is the understanding of the Committee.

Thus, 60 percent of the "capital" assumes, or should result in, "controlling

interest" in the corporation. Reinforcing this interpretation of the term "capital,"
as referring to controlling interest or shares entitled to vote, is the definition of a
50
"Philippine national" in the Foreign Investments Act of 1991, to wit:

MR. NOLLEDO. Therefore, we need additional Filipino capital?

SEC. 3. Definitions. - As used in this Act:

permitted by the Corporation Code, does the Committee adopt the grandfather
rule?

MR. VILLEGAS. Yes.

48

xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by the
Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the
phrase "voting stock or controlling interest."
MR. AZCUNA. Hence, without the Davide amendment, the committee report
would read: "corporations or associations at least sixty percent of whose
CAPITAL is owned by such citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60
percent of the capital to be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if they are
the minority. Let us say 40 percent of the capital is owned by them, but it
is the voting capital, whereas, the Filipinos own the nonvoting shares. So
we can have a situation where the corporation is controlled by foreigners
despite being the minority because they have the voting capital. That is
the anomaly that would result here.
MR. BENGZON. No, the reason we eliminated the word "stock" as stated
in the 1973 and 1935 Constitutions is that according to Commissioner
Rodrigo, there are associations that do not have stocks. That is why we
say "CAPITAL."
MR. AZCUNA. We should not eliminate the phrase "controlling interest."
MR. BENGZON. In the case of stock corporations, it is assumed.
(Emphasis supplied)

a. The term "Philippine national" shall mean a citizen of the Philippines; or a

domestic partnership or association wholly owned by citizens of the
Philippines; or a corporation organized under the laws of the Philippines
of which at least sixty percent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines; or a
corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent (100%)
of the capital stock outstanding and entitled to vote is wholly owned by Filipinos
or a trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least sixty percent
(60%) of the fund will accrue to the benefit of Philippine nationals: Provided,
That where a corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least
sixty percent (60%) of the capital stock outstanding and entitled to vote of each
of both corporations must be owned and held by citizens of the Philippines and
at least sixty percent (60%) of the members of the Board of Directors of each
of both corporations must be citizens of the Philippines, in order that the
corporation, shall be considered a "Philippine national." (Emphasis supplied)
In explaining the definition of a "Philippine national," the Implementing Rules
and Regulations of the Foreign Investments Act of 1991 provide:
b. "Philippine national" shall mean a citizen of the Philippines or a domestic
partnership or association wholly owned by the citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least
sixty percent [60%] of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines; or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty percent [60%] of the fund will accrue
to the benefit of the Philippine nationals; Provided, that where a corporation its
non-Filipino stockholders own stocks in a Securities and Exchange
Commission [SEC] registered enterprise, at least sixty percent [60%] of the
capital stock outstanding and entitled to vote of both corporations must be
owned and held by citizens of the Philippines and at least sixty percent [60%]
of the members of the Board of Directors of each of both corporation must be
citizens of the Philippines, in order that the corporation shall be considered a
Philippine national. The control test shall be applied for this purpose.

49

Compliance with the required Filipino ownership of a corporation shall be

determined on the basis of outstanding capital stock whether fully paid

or not, but only such stocks which are generally entitled to vote are
considered.
For stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be considered
held by Philippine citizens or Philippine nationals.
Individuals or juridical entities not meeting the aforementioned
qualifications are considered as non-Philippine nationals. (Emphasis
supplied)
Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital"
required in the Constitution. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is
required. The legal and beneficial ownership of 60 percent of the outstanding
capital stock must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is "considered as nonPhilippine national[s]."
Under Section 10, Article XII of the Constitution, Congress may "reserve to
citizens of the Philippines or to corporations or associations at least sixty per
centum of whose capital is owned by such citizens, or such higher percentage
as Congress may prescribe, certain areas of investments." Thus, in numerous
laws Congress has reserved certain areas of investments to Filipino citizens or
to corporations at least sixty percent of the "capital" of which is owned by
Filipino citizens. Some of these laws are: (1) Regulation of Award of
Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives
Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium
Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development
Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A.
No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055;
and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term "capital" in
Section 11, Article XII of the Constitution is also used in the same context in
numerous laws reserving certain areas of investments to Filipino citizens.
To construe broadly the term "capital" as the total outstanding capital stock,
including both common and non-voting preferred shares, grossly contravenes
the intent and letter of the Constitution that the "State shall develop a selfreliant and independent national economy effectively controlled by Filipinos."
A broad definition unjustifiably disregards who owns the all-important voting
stock, which necessarily equates to control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term
"capital." Let us assume that a corporation has 100 common shares owned by
foreigners and 1,000,000 non-voting preferred shares owned by Filipinos, with
both classes of share having a par value of one peso (P1.00) per share. Under
the broad definition of the term "capital," such corporation would be considered
compliant with the 40 percent constitutional limit on foreign equity of public
utilities since the overwhelming majority, or more than 99.999 percent, of the
total outstanding capital stock is Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares have
voting rights in the election of directors, even if they hold only 100 shares. The
foreigners, with a minuscule equity of less than 0.001 percent, exercise control
over the public utility. On the other hand, the Filipinos, holding more than
99.999 percent of the equity, cannot vote in the election of directors and hence,
have no control over the public utility. This starkly circumvents the intent of the
framers of the Constitution, as well as the clear language of the Constitution, to
place the control of public utilities in the hands of Filipinos. It also renders
illusory the State policy of an independent national economy effectively
controlled by Filipinos.
The example given is not theoretical but can be found in the real world, and in
fact exists in the present case.
Holders of PLDT preferred shares are explicitly denied of the right to vote in
the election of directors. PLDTs Articles of Incorporation expressly state that
"the holders of Serial Preferred Stock shall not be entitled to vote at any
meeting of the stockholders for the election of directors or for any other
purpose or otherwise participate in any action taken by the corporation or its
51
stockholders, or to receive notice of any meeting of stockholders."
On the other hand, holders of common shares are granted the exclusive right
52
to vote in the election of directors. PLDTs Articles of Incorporation state that
"each holder of Common Capital Stock shall have one vote in respect of each
share of such stock held by him on all matters voted upon by the stockholders,
and the holders of Common Capital Stock shall have the exclusive right
53
to vote for the election of directors and for all other purposes."
In short, only holders of common shares can vote in the election of directors,
meaning only common shareholders exercise control over PLDT. Conversely,
holders of preferred shares, who have no voting rights in the election of
directors, do not have any control over PLDT. In fact, under PLDTs Articles of
Incorporation, holders of common shares have voting rights for all purposes,
while holders of preferred shares have no voting right for any purpose
whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a

majority of the common shares of PLDT. In fact, based on PLDTs 2010
54
General Information Sheet (GIS), which is a document required to be
55
submitted annually to the Securities and Exchange Commission, foreigners
hold 120,046,690 common shares of PLDT whereas Filipinos hold only
56
66,750,622 common shares. In other words, foreigners hold 64.27% of the
total number of PLDTs common shares, while Filipinos hold only 35.73%.
Since holding a majority of the common shares equates to control, it is clear
that foreigners exercise control over PLDT. Such amount of control
unmistakably exceeds the allowable 40 percent limit on foreign ownership of
public utilities expressly mandated in Section 11, Article XII of the Constitution.
57

Moreover, the Dividend Declarations of PLDT for 2009, as submitted to the

58
SEC, shows that per share the SIP preferred shares earn a pittance in
dividends compared to the common shares. PLDT declared dividends for the
common shares at P70.00 per share, while the declared dividends for the
59
preferred shares amounted to a measly P1.00 per share. So the preferred
shares not only cannot vote in the election of directors, they also have very
little and obviously negligible dividend earning capacity compared to common
shares.
60

As shown in PLDTs 2010 GIS, as submitted to the SEC, the par value of
PLDT common shares is P5.00 per share, whereas the par value of preferred
shares is P10.00 per share. In other words, preferred shares have twice the
par value of common shares but cannot elect directors and have only 1/70 of
the dividends of common shares. Moreover, 99.44% of the preferred shares
are owned by Filipinos while foreigners own only a minuscule 0.56% of the
61
preferred shares.
Worse, preferred shares constitute 77.85% of the
authorized capital stock of PLDT while common shares constitute only
62
22.15%. This undeniably shows that beneficial interest in PLDT is not with
the non-voting preferred shares but with the common shares, blatantly violating
the constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership in a public utility.
The legal and beneficial ownership of 60 percent of the outstanding capital
stock must rest in the hands of Filipinos in accordance with the constitutional
mandate. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is constitutionally required
for the States grant of authority to operate a public utility. The undisputed fact
that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting
and earn only 1/70 of the dividends that PLDT common shares earn, grossly
violates the constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and earn
less than 60 percent of the dividends, of PLDT. This directly contravenes
the express command in Section 11, Article XII of the Constitution that "[n]o

franchise, certificate, or any other form of authorization for the operation of a

public utility shall be granted except to x x x corporations x x x organized under
the laws of the Philippines, at least sixty per centum of whose capital is
owned by such citizens x x x."
To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which
class of shares exercises the sole right to vote in the election of directors, and
thus exercise control over PLDT; (2) Filipinos own only 35.73% of PLDTs
common shares, constituting a minority of the voting stock, and thus do not
exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos,
have no voting rights; (4) preferred shares earn only 1/70 of the dividends that
63
common shares earn; (5) preferred shares have twice the par value of
common shares; and (6) preferred shares constitute 77.85% of the authorized
capital stock of PLDT and common shares only 22.15%. This kind of
ownership and control of a public utility is a mockery of the Constitution.
Incidentally, the fact that PLDT common shares with a par value of P5.00 have
64
a current stock market value of P2,328.00 per share, while PLDT preferred
shares with a par value of P10.00 per share have a current stock market value
65
ranging from only P10.92 to P11.06 per share, is a glaring confirmation by
the market that control and beneficial ownership of PLDT rest with the common
shares, not with the preferred shares.
Indisputably, construing the term "capital" in Section 11, Article XII of the
Constitution to include both voting and non-voting shares will result in the
abject surrender of our telecommunications industry to foreigners, amounting
to a clear abdication of the States constitutional duty to limit control of public
utilities to Filipino citizens. Such an interpretation certainly runs counter to the
constitutional provision reserving certain areas of investment to Filipino
citizens, such as the exploitation of natural resources as well as the ownership
of land, educational institutions and advertising businesses. The Court should
never open to foreign control what the Constitution has expressly reserved to
Filipinos for that would be a betrayal of the Constitution and of the national
interest. The Court must perform its solemn duty to defend and uphold the
intent and letter of the Constitution to ensure, in the words of the Constitution,
"a self-reliant and independent national economy effectively controlled by
Filipinos."
Section 11, Article XII of the Constitution, like other provisions of the
Constitution expressly reserving to Filipinos specific areas of investment, such
as the development of natural resources and ownership of land, educational
institutions and advertising business, is self-executing. There is no need for
legislation to implement these self-executing provisions of the Constitution. The
rationale why these constitutional provisions are self-executing was explained
66
in Manila Prince Hotel v. GSIS, thus:

x x x Hence, unless it is expressly provided that a legislative act is necessary

to enforce a constitutional mandate, the presumption now is that all provisions
of the constitution are self-executing. If the constitutional provisions are treated
as requiring legislation instead of self-executing, the legislature would have the
power to ignore and practically nullify the mandate of the fundamental law. This
can be cataclysmic. That is why the prevailing view is, as it has always been,
that
. . . in case of doubt, the Constitution should be considered self-executing
rather than non-self-executing. . . . Unless the contrary is clearly intended,
the provisions of the Constitution should be considered self-executing,
as a contrary rule would give the legislature discretion to determine
when, or whether, they shall be effective. These provisions would be
subordinated to the will of the lawmaking body, which could make them entirely
meaningless by simply refusing to pass the needed implementing statute.
(Emphasis supplied)
In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice
Reynato S. Puno, later Chief Justice, agreed that constitutional provisions are
presumed to be self-executing. Justice Puno stated:
Courts as a rule consider the provisions of the Constitution as self-executing,
rather than as requiring future legislation for their enforcement. The reason is
not difficult to discern. For if they are not treated as self-executing, the
mandate of the fundamental law ratified by the sovereign people can be
easily ignored and nullified by Congress. Suffused with wisdom of the
ages is the unyielding rule that legislative actions may give breath to
constitutional rights but congressional inaction should not suffocate
them.
Thus, we have treated as self-executing the provisions in the Bill of Rights on
arrests, searches and seizures, the rights of a person under custodial
investigation, the rights of an accused, and the privilege against selfincrimination. It is recognized that legislation is unnecessary to enable courts to
effectuate constitutional provisions guaranteeing the fundamental rights of life,
liberty and the protection of property. The same treatment is accorded to
constitutional provisions forbidding the taking or damaging of property for
public use without just compensation. (Emphasis supplied)
67

Thus, in numerous cases, this Court, even in the absence of implementing

legislation, applied directly the provisions of the 1935, 1973 and 1987
68
Constitutions limiting land ownership to Filipinos. In Soriano v. Ong Hoo, this
Court ruled:
x x x As the Constitution is silent as to the effects or consequences of a sale by
a citizen of his land to an alien, and as both the citizen and the alien have

violated the law, none of them should have a recourse against the other, and it
should only be the State that should be allowed to intervene and determine
what is to be done with the property subject of the violation. We have said that
what the State should do or could do in such matters is a matter of public
policy, entirely beyond the scope of judicial authority. (Dinglasan, et al. vs. Lee
Bun Ting, et al., 6 G. R. No. L-5996, June 27, 1956.) While the legislature
has not definitely decided what policy should be followed in cases of
violations against the constitutional prohibition, courts of justice cannot
go beyond by declaring the disposition to be null and void as violative of
the Constitution. x x x (Emphasis supplied)
To treat Section 11, Article XII of the Constitution as not self-executing would
mean that since the 1935 Constitution, or over the last 75 years, not one of the
constitutional provisions expressly reserving specific areas of investments to
corporations, at least 60 percent of the "capital" of which is owned by Filipinos,
was enforceable. In short, the framers of the 1935, 1973 and 1987
Constitutions miserably failed to effectively reserve to Filipinos specific areas of
investment, like the operation by corporations of public utilities, the exploitation
by corporations of mineral resources, the ownership by corporations of real
estate, and the ownership of educational institutions. All the legislatures that
convened since 1935 also miserably failed to enact legislations to implement
these vital constitutional provisions that determine who will effectively control
the national economy, Filipinos or foreigners. This Court cannot allow such an
absurd interpretation of the Constitution.
This Court has held that the SEC "has both regulatory and adjudicative
69
functions." Under its regulatory functions, the SEC can be compelled by
mandamus to perform its statutory duty when it unlawfully neglects to perform
the same. Under its adjudicative or quasi-judicial functions, the SEC can be
also be compelled by mandamus to hear and decide a possible violation of any
law it administers or enforces when it is mandated by law to investigate such
violation.1awphi1
70

Under Section 17(4) of the Corporation Code, the SEC has the regulatory
function to reject or disapprove the Articles of Incorporation of any corporation
where "the required percentage of ownership of the capital stock to be
owned by citizens of the Philippines has not been complied with as
required by existing laws or the Constitution." Thus, the SEC is the
government agency tasked with the statutory duty to enforce the nationality
requirement prescribed in Section 11, Article XII of the Constitution on the
ownership of public utilities. This Court, in a petition for declaratory relief that is
treated as a petition for mandamus as in the present case, can direct the SEC
to perform its statutory duty under the law, a duty that the SEC has apparently
unlawfully neglected to do based on the 2010 GIS that respondent PLDT
submitted to the SEC.

71

Under Section 5(m) of the Securities Regulation Code, the SEC is vested
with the "power and function" to "suspend or revoke, after proper notice and
hearing, the franchise or certificate of registration of corporations,
partnerships or associations, upon any of the grounds provided by law."
The SEC is mandated under Section 5(d) of the same Code with the "power
and function" to "investigate x x x the activities of persons to ensure
compliance" with the laws and regulations that SEC administers or enforces.
The GIS that all corporations are required to submit to SEC annually should
put the SEC on guard against violations of the nationality requirement
prescribed in the Constitution and existing laws. This Court can compel the
SEC, in a petition for declaratory relief that is treated as a petition for
mandamus as in the present case, to hear and decide a possible violation of
Section 11, Article XII of the Constitution in view of the ownership structure of
PLDTs voting shares, as admitted by respondents and as stated in PLDTs
2010 GIS that PLDT submitted to SEC.
WHEREFORE, we PARTLY GRANT the petition and rule that the term
"capital" in Section 11, Article XII of the 1987 Constitution refers only to shares
of stock entitled to vote in the election of directors, and thus in the present case
only to common shares, and not to the total outstanding capital stock (common
and non-voting preferred shares). Respondent Chairperson of the Securities
and Exchange Commission is DIRECTED to apply this definition of the term
"capital" in determining the extent of allowable foreign ownership in respondent
Philippine Long Distance Telephone Company, and if there is a violation of
Section 11, Article XII of the Constitution, to impose the appropriate sanctions
under the law.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
G.R. No. L-33172

October 18, 1979

ERNESTO CEASE, CECILIA CEASE, MARION CEASE, TERESA CEASELACEBAL and the F.L. CEASE PLANTATION CO., INC. as Trustee of
properties of the defunct TIAONG MILLING & PLANTATION CO.,
petitioners,
vs.
HONORABLE COURT OF APPEALS, (Special Seventh Division), HON.
MANOLO L. MADDELA, Presiding Judge, Court of First Instance of
Quezon, BENJAMIN CEASE and FLORENCE CEASE, respondents.
GUERRERO, J:

Appeal by certiorari from the decision of the Court of Appeals in CA-G.R. No.
45474, entitled "Ernesto Cease, et al. vs. Hon. Manolo L. Maddela, Judge of
1
the Court of First Instance of Quezon, et al." which dismissed the petition for
certiorari, mandamus, and prohibition instituted by the petitioners against the
respondent judge and the private respondents.
The antecedents of the case, as found by the appellate court, are as follows:
IT RESULTING: That the antecedents are not difficult to
understand; sometime in June 1908, one Forrest L. Cease
common predecessor in interest of the parties together with
five (5) other American citizens organized the Tiaong Milling
and Plantation Company and in the course of its corporate
existence the company acquired various properties but at the
same time all the other original incorporators were bought out
by Forrest L. Cease together with his children namely Ernest,
Cecilia, Teresita, Benjamin, Florence and one Bonifacia
Tirante also considered a member of the family; the charter of
the company lapsed in June 1958; but whether there were
steps to liquidate it, the record is silent; on 13 August 1959,
Forrest L. Cease died and by extrajudicial partition of his
shares, among the children, this was disposed of on 19
October 1959; it was here where the trouble among them
came to arise because it would appear that Benjamin and
Florence wanted an actual division while the other children
wanted reincorporation; and proceeding on that, these other
children Ernesto, Teresita and Cecilia and aforementioned
other stockholder Bonifacia Tirante proceeded to incorporate
themselves into the F.L. Cease Plantation Company and
registered it with the Securities and Exchange Commission on
9 December, 1959; apparently in view of that, Benjamin and
Florence for their part initiated a Special Proceeding No. 3893
of the Court of First Instance of Tayabas for the settlement of
the estate of Forest L. Cease on 21 April, 1960 and one month
afterwards on 19 May 1960 they filed Civil Case No. 6326
against Ernesto, Teresita and Cecilia Cease together with
Bonifacia Tirante asking that the Tiaong Milling and Plantation
Corporation be declared Identical to F.L. Cease and that its
properties be divided among his children as his intestate heirs;
this Civil Case was resisted by aforestated defendants and
notwithstanding efforts of the plaintiffs to have the properties
placed under receivership, they were not able to succeed
because defendants filed a bond to remain as they have
remained in possession; after that and already, during the
pendency of Civil Case No. 6326 specifically on 21 May, 1961
apparently on the eve of the expiry of the three (3) year period
provided by the law for the liquidation of corporations, the

board of liquidators of Tiaong Milling executed an assignment

and conveyance of properties and trust agreement in favor of
F.L. Cease Plantation Co. Inc. as trustee of the Tiaong Milling
and Plantation Co. so Chat upon motion of the plaintiffs trial
Judge ordered that this alleged trustee be also included as
party defendant; now this being the situation, it will be
remembered that there were thus two (2) proceedings pending
in the Court of First Instance of Quezon namely Civil Case No.
6326 and Special Proceeding No. 3893 but both of these were
assigned to the Honorable Respondent Judge Manolo L.
Maddela p. 43 and the case was finally heard and submitted
upon stipulation of facts pp, 34-110, rollo; and trial Judge by
decision dated 27 December 1969 held for the plaintiffs
Benjamin and Florence, the decision containing the following
dispositive part:
VIEWED IN THE LIGHT OF ALL THE
FOREGOING, judgment is hereby rendered in
favor of plaintiffs and against the defendants
declaring that:
1) The assets or properties of the defunct
Tiaong Milling and Plantation Company now
appearing under the name of F.L. Cease
Plantation Company as Trustee, is the estate
also of the deceased Forrest L. Cease and
ordered divided, share and share alike, among
his six children the plaintiffs and the
defendants in accordance with Rule 69, Rules
of Court;
2) The Resolution to Sell dated October 12,
1959 and the Transfer and Conveyance with
Trust Agreement is hereby set aside as
improper and illegal for the purposes and
effect that it was intended and, therefore, null
and void;
3) That F.L. Cease Plantation Company is
removed as 'Trustee for interest against the
estate and essential to the protection of
plaintiffs' rights and is hereby ordered to
deliver and convey all the properties and
assets of the defunct Tiaong Milling now under
its name, custody and control to whomsoever
be appointed as Receiver - disqualifying and
of the parties herein - the latter to act

accordingly upon proper assumption of office;

and
4) Special Proceedings No. 3893 for
administration is terminated and dismissed;
the instant case to proceed but on issues of
damages only and for such action inherently
essential for partition.
SO ORDERED.
Lucena City, December 27, 1969., pp. 122-a123, rollo.
upon receipt of that, defendants there filled a notice of appeal
p. 129, rollo together with an appeal bond and a record on
appeal but the plaintiffs moved to dismiss the appeal on the
ground that the judgment was in fact interlocutory and not
appealable p. 168 rollo and this position of defendants was
sustained by trial Judge, His Honor ruling that

decision of 27 December, 1969 as well as the order of 27 April,

1970 suffered of certain fatal defects, which respondents deny
and on their part raise the preliminary point that this Court of
Appeals has no authority to give relief to petitioners because
not
in aid of its appellate jurisdiction,
and that the questions presented cannot be raised for the first
time before this Court of Appeals;
Respondent Court of Appeals in its decision promulgated December 9, 1970
dismissed the petition with costs against petitioners, hence the present petition
to this Court on the following assignment of errors:
THE COURT OF APPEALS ERRED I. IN SANCTIONING THE WRONGFUL EXERCISE OF JURISDICTION
BEYOND THE LIMITS OF AUTHORITY CONFERRED BY LAW UPON THE
LOWER COURT, WHEN IT PROCEEDED TO HEAR, ADJUDGE AND
ADJUDICATE -

IN VIEW OF THE FOREGOING, the appeal

interposed by plaintiffs is hereby dismissed as
premature and the Record on Appeal is
necessarily disapproved as improper at this
stage of the proceedings.

(a) Special Proceedings No. 3893 for the settlement of the

Estate of Forrest L. Cease, simultaneously and concurrently
with -

SO ORDERED.

(b) Civil Case No. 6326, wherein the lower Court ordered
Partition under Rule 69, Rules of Court -

Lucena City, April 27, 1970.

and so it was said defendants brought the matter first to the
Supreme Court, on mandamus on 20 May, 1970 to compel the
appeal and certiorari and prohibition to annul the order of 27
April, 1970 on the ground that the decision was "patently
erroneous" p. 16, rollo; but the Supreme Court remanded the
case to this Court of Appeals by resolution of 27 May 1970, p.
173, and this Court of Appeals on 1 July 1970 p. 175
dismissed the petition so far as the mandamus was concerned
taking the view that the decision sought to be appealed dated
27 December, 1969 was interlocutory and not appealable but
on motion for reconsideration of petitioners and since there
was possible merit so far as its prayer for certiorari and
prohibition was concerned, by resolution of the Court on 19
August, 1970, p. 232, the petition was permitted to go ahead in
that capacity; and it is the position of petitioners that the

THE ISSUE OF LEGAL OWNERSHIP OF THE PROPERTIES COMMONLY

INVOLVED IN BOTH ACTIONS HAVING BEEN RAISED AT THE OUTSET BY
THE TIAONG MILLING AND PLANTATION COMPANY, AS THE
REGISTERED OWNER OF SUCH PROPERTIES UNDER ACT 496.
II. IN AFFIRMING - UNSUPPORTED BY ANY EVIDENCE WHATSOEVER
NOR CITATION OF ANY LAW TO JUSTIFY - THE UNWARRANTED
CONCLUSION THAT SUBJECT PROPERTIES, FOUND BY THE LOWER
COURT AND THE COURT OF APPEALS AS ACTUALLY REGISTERED IN
THE NAME OF PETITIONER CORPORATION AND/OR ITS PREDECESSOR
IN INTEREST, THE TIAONG MILLING AND PLANTATION COMPANY,
DURING ALL THE 50 YEARS OF ITS CORPORATE EXISTENCE "ARE ALSO
PROPERTIES OF THE ESTATE OF FOREST L. CEASE."
III. IN AFFIRMING THE ARBITRARY CONCLUSION OF THE LOWER
COURT THAT ITS DECISION OF DECEMBER 27,1969 IS AN
"INTERLUCUTORY DECISION." IN DISMISSED NG THE PETITION FOR

WRIT OF MANDAMUS, AND IN AFFIRMING THE MANIFESTLY UNJUST

JUDGMENT RENDERED WHICH CONTRADICTS THE FINDINGS OF
ULTIMATE FACTS THEREIN CONTAINED.
During the period that ensued after the filing in this Court of the respective
briefs and the subsequent submission of the case for decision, some incidents
had transpired, the summary of which may be stated as follows:
1. Separate from this present appeal, petitioners filed a petition for certiorari
and prohibition in this Court, docketed as G.R. No. L-35629 (Ernesto Cease, et
al. vs. Hon. Manolo L. Maddela, et al.) which challenged the order of
respondent judge dated September 27, 1972 appointing his Branch Clerk of
Court, Mr. Eleno M. Joyas, as receiver of the properties subject of the
appealed civil case, which order, petitioners saw as a virtual execution of the
lower court's judgment (p. 92, rollo). In Our resolution of November 13, 1972,
issued in G.R. No. L-35629, the petition was denied since respondent judge
merely appointed an auxilliary receiver for the preservation of the properties as
well as for the protection of the interests of all parties in Civil Case No. 6326;
but at the same time, We expressed Our displeasure in the appointment of the
branch clerk of court or any other court personnel for that matter as receiver.
(p. 102, rollo).
2. Meanwhile, sensing that the appointed receiver was making some attempts
to take possession of the properties, petitioners filed in this present appeal an
urgent petition to restrain proceedings in the lower court. We resolved the
petition on January 29, 1975 by issuing a corresponding temporary restraining
order enjoining the court a quo from implementing its decision of December 27,
1969, more particularly, the taking over by a receiver of the properties subject
of the litigation, and private respondents Benjamin and Florence Cease from
proceeding or taking any action on the matter until further orders from this
Court (pp. 99-100, rollo). Private respondents filed a motion for reconsideration
of Our resolution of January 29, 1975. After weighing the arguments of the
parties and taking note of Our resolution in G.R. No. L-35629 which upheld the
appointment of a receiver, We issued another resolution dated April 11, 1975
lifting effective immediately Our previous temporary restraining order which
enforced the earlier resolution of January 29, 1975 (pp. 140-141, rollo).
3. On February 6, 1976, private respondents filed an urgent petition to restrain
proceedings below in view of the precipitate replacement of the court
appointed receiver Mayor Francisco Escueta (vice Mr. Eleno M. Joyas) and the
appointment of Mr. Guillermo Lagrosa on the eve of respondent Judge
Maddela's retirement (p. 166, rollo). The urgent petition was denied in Our
resolution of February 18, 1976 (p. 176, rollo).
4. Several attempts at a compromise agreement failed to materialize. A
Tentative Compromise Agreement dated July 30, 1975 was presented to the
Court on August 6, 1976 for the signature of the parties, but respondents

"unceremoniously" repudiated the same by leaving the courtroom without the

permission of the court (Court of First Instance of Quezon, Branch 11) as a
result of which respondents and their counsel were cited for contempt (p. 195,
197, rollo) that respondents' reason for the repudiation appears to be
petitioners' failure to render an audited account of their administration covering
the period from May 31, 1961 up to January 29, 1974, plus the inclusion of a
provision on waiver and relinquishment by respondents of whatever rights that
may have accrued to their favor by virtue of the lower court's decision and the
affirmative decision of the appellate court.
We go now to the alleged errors committed by the respondent Court of
Appeals.
As can be gleaned from petitioners' brief and the petition itself, two contentions
underlie the first assigned error. First, petitioners argue that there was an
irregular and arbitrarte termination and dismissal of the special proceedings for
judicial administration simultaneously ordered in the lower court . s decision in
Civil Case No. 6326 adjudicating the partition of the estate, without
categorically, reasoning the opposition to the petition for administration
Second, that the issue of ownership had been raised in the lower court when
Tiaong Milling asserted title over the properties registered in its corporate
name adverse to Forrest L. Cease or his estate, and that the said issue was
erroneously disposed of by the trial court in the partition proceedings when it
concluded that the assets or properties of the defunct company is also the
estate of the deceased proprietor.
The propriety of the dismissal and termination of the special proceedings for
judicial administration must be affirmed in spite of its rendition in another
related case in view of the established jurisprudence which favors partition
when judicial administration become, unnecessary. As observed by the Court
of Appeals, the dismissal at first glance is wrong, for the reason that what was
actually heard was Civil Case No. 6326. The technical consistency, however, it
is far less importance than the reason behind the doctrinal rule against placing
an estate under administration. Judicial rulings consistently hold the view that
where partition is possible, either judicial or extrajudicial, the estate should not
be burdened with an administration proceeding without good and compelling
reason. When the estate has no creditors or pending obligations to be paid, the
beneficiaries in interest are not bound to submit the property to judicial
administration which is always long and costly, or to apply for the appointment
of an administrator by the court, especially when judicial administration is
unnecessary and superfluous. Thus When a person dies without leaving pending obligations to be
paid, his heirs, whether of age or not, are bound to submit the
property to a judicial administration, which is always long and
costly, or to apply for the appointment of an administrator by
the court. It has been uniformly held that in such case the

judicial administration and the appointment of an administrator

are superfluous and unnecessary proceedings (Ilustre vs.
Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19 Phil,
434; Bondad vs. Bondad, 34 Phil., 232; Baldemor vs.
Malangyaon, 34 Phil., 367; Fule vs. Fule, 46 Phil., 317).
Syllabus, Intestate estate of the deceased Luz Garcia. Pablo
G. Utulo vs. Leona Pasion Viuda de Garcia, 66 Phil. 302.
Where the estate has no debts, recourse may be had to an
administration proceeding only if the heirs have good reasons
for not resorting to an action for partition. Where partition is
possible, either in or out of court, the estate should not be
burdened with an administration proceeding without good and
compelling reasons. (Intestate Estate of Mercado vs.
Magtibay, 96 Phil. 383)
In the records of this case, We find no indication of any indebtedness of the
estate. No creditor has come up to charge the estate within the two-year period
after the death of Forrest L. Cease, hence, the presumption under Section 1,
Rule 74 that the estate is free from creditors must apply. Neither has the status
of the parties as legal heirs, much less that of respondents, been raised as an
issue. Besides, extant in the records is the stipulation of the parties to submit
the pleadings and contents of the administration proceedings for the
cognizance of the trial judge in adjudicating the civil case for partition
(Respondents' Brief, p, 20, rollo). As respondents observe, the parties in both
cases are the same, so are the properties involved; that actual division is the
primary objective in both actions; the theory and defense of the respective
parties are likewise common; and that both cases have been assigned to the
same respondent judge. We feel that the unifying effect of the foregoing
circumstances invites the wholesome exception to the structures of procedural
rule, thus allowing, instead, room for judicial flexibility. Respondent judge's
dismissal of the administration proceedings then, is a judicious move,
appreciable in today's need for effective and speedy administration of justice.
There being ample reason to support the dismissal of the special proceedings
in this appealed case, We cannot see in the records any compelling reason
why it may not be dismissed just the same even if considered in a separate
action. This is inevitably certain specially when the subject property has
already been found appropriate for partition, thus reducing the petition for
administration to a mere unnecessary solicitation.
The second point raised by petitioners in their first assigned error is equally
untenable. In effect, petitioners argue that the action for partition should not
have prospered in view of the repudiation of the co-ownership by Tiaong
Milling and Plantation Company when, as early in the trial court, it already
asserted ownership and corporate title over the properties adverse to the right
of ownership of Forrest L. Cease or his estate. We are not unmindful of the
doctrine relied upon by petitioners in Rodriguez vs. Ravilan, 17 Phil. 63

wherein this Court held that in an action for partition, it is assumed that the
parties by whom it is prosecuted are all co-owners or co-proprietors of the
property to be divided, and that the question of common ownership is not to be
argued, not the fact as to whether the intended parties are or are not the
owners of the property in question, but only as to how and in what manner and
proportion the said property of common ownership shall be distributed among
the interested parties by order of the Court. Consistent with this dictum, it has
been field that if any party to a suit for partition denies the pro-indiviso
character of the estate whose partition is sought, and claims instead, exclusive
title thereto the action becomes one for recovery of property cognizable in the
2
courts of ordinary jurisdiction.
Petitioners' argument has only theoretical persuasion, to say the least, rather
apparent than real. It must be remembered that when Tiaong Milling adduced
its defense and raised the issue of ownership, its corporate existence already
terminated through the expiration of its charter. It is clear in Section 77 of Act
No. 1459 (Corporation Law) that upon the expiration of the charter period, the
corporation ceases to exist and is dissolved ipso facto except for purposes
connected with the winding up and liquidation. The provision allows a three
year, period from expiration of the charter within which the entity gradually
settles and closes its affairs, disposes and convey its property and to divide its
capital stock, but not for the purpose of continuing the business for which it
was established. At this terminal stage of its existence, Tiaong Milling may no
longer persist to maintain adverse title and ownership of the corporate assets
as against the prospective distributees when at this time it merely holds the
property in trust, its assertion of ownership is not only a legal contradiction, but
more so, to allow it to maintain adverse interest would certainly thwart the very
purpose of liquidation and the final distribute loll of the assets to the proper,
parties.
We agree with the Court of Appeals in its reasoning that substance is more
important than form when it sustained the dismissal of Special Proceedings
No. 3893, thus a) As to the dismissal of Special Proceedings No. 3893, of
course, at first glance, this was wrong, for the reason that the
case trial had been heard was Civil Case No. 6326; but what
should not be overlooked either is Chat respondent Judge was
the same Judge that had before him in his own sala, said
Special Proceedings No. 3893, p. 43 rollo, and the parties to
the present Civil Case No. 6326 had themselves asked
respondent Judge to take judicial notice of the same and its
contents page 34, rollo; it is not difficult to see that when
respondent Judge in par. 4 of the dispositive part of his
decision complained of, ordered that,

4) Special Proceedings No. 3893 for

administration is terminated and dismissed;
the instant case to proceed but on issues of
damages only and for such action inherently
essential or partition. p. 123, rollo,

children, ... ", the trial court did aptly apply the familiar exception to the general
rule by disregarding the legal fiction of distinct and separate corporate
personality and regarding the corporation and the individual member one and
the same. In shredding the fictitious corporate veil, the trial judge narrated the
undisputed factual premise, thus:

in truth and in fact, His Honor was issuing that order also
within Civil Case No. 632 but in connection with Special
Proceedings No. 389:3: for substance is more important Chan
form, the contending par ties in both proceedings being exactly
the same, but not only this, let it not be forgotten that when His
Honor dismissed Special Proceedings No. 3893, that dismissal
precisely was a dismissal that petitioners herein had
themselves sought and solicited from respondent Judge as
petitioners themselves are in their present petition pp. 5-6,
rollo; this Court must find difficulty in reconciling petitioners'
attack with the fact that it was they themselves that had
insisted on that dismissal; on the principle that not he who is
favored but he who is hurt by a judicial order is he only who
should be heard to complain and especially since
extraordinary legal remedies are remedies in extermies
granted to parties ' who have been the victims not merely of
errors but of grave wrongs, and it cannot be seen how one
who got what he had asked could be heard to claim that he
had been the victim of a wrong, petitioners should not now
complain of an order they had themselves asked in order to
attack such an order afterwards; if at all, perhaps, third parties,
creditors, the Bureau of Internal Revenue, might have been
prejudiced, and could have had the personality to attack that
dismissal of Special Proceedings No. 3893, but not petitioners
herein, and it is not now for this Court of Appeals to protect
said third persons who have not come to the Court below or
sought to intervene herein;

While the records showed that originally its incorporators were

aliens, friends or third-parties in relation of one to another, in
the course of its existence, it developed into a close family
corporation. The Board of Directors and stockholders belong to
one family the head of which Forrest L. Cease always retained
the majority stocks and hence the control and management of
its affairs. In fact, during the reconstruction of its records in
1947 before the Security and Exchange Commission only 9
nominal shares out of 300 appears in the name of his 3 eldest
children then and another person close to them. It is likewise
noteworthy to observe that as his children increase or perhaps
become of age, he continued distributing his shares among
them adding Florence, Teresa and Marion until at the time of
his death only 190 were left to his name. Definitely, only the
members of his family benefited from the Corporation.

On the second assigned error, petitioners argue that no evidence has been
found to support the conclusion that the registered properties of Tiaong Milling
are also properties of the estate of Forrest L. Cease; that on the contrary, said
properties are registered under Act No. 496 in the name of Tiaong Milling as
lawful owner and possessor for the last 50 years of its corporate existence.

The accounts of the corporation and therefore its operation, as

well as that of the family appears to be indistinguishable and
apparently joined together. As admitted by the defendants
(Manifestation of Compliance with Order of March 7, 1963
[Exhibit "21"] the corporation 'never' had any account with any
banking institution or if any account was carried in a bank on
its behalf, it was in the name of Mr. Forrest L. Cease. In brief,
the operation of the Corporation is merged with those of the
majority stockholders, the latter using the former as his
instrumentality and for the exclusive benefits of all his family.
From the foregoing indication, therefore, there is truth in
plaintiff's allegation that the corporation is only a business
conduit of his father and an extension of his personality, they
are one and the same thing. Thus, the assets of the
corporation are also the estate of Forrest L. Cease, the father
of the parties herein who are all legitimate children of full
blood.

We do not agree. In reposing ownership to the estate of Forrest L. Cease, the

trial court indeed found strong support, one that is based on a well-entrenched
principle of law. In sustaining respondents' theory of "merger of Forrest L.
Cease and The Tiaong Milling as one personality", or that "the company is only
the business conduit and alter ego of the deceased Forrest L. Cease and the
registered properties of Tiaong Milling are actually properties of Forrest L.
Cease and should be divided equally, share and share alike among his six

A rich store of jurisprudence has established the rule known as the doctrine of
disregarding or piercing the veil of corporate fiction. Generally, a corporation is
invested by law with a personality separate and distinct from that of the
persons composing it as well as from that of any other legal entity to which it
may be related. By virtue of this attribute, a corporation may not, generally, be
made to answer for acts or liabilities of its stockholders or those of the legal
entities to which it may be connected, and vice versa. This separate and

distinct personality is, however, merely a fiction created by law for convenience
and to promote the ends of justice (Laguna Transportation Company vs. Social
Security System, L-14606, April 28, 1960; La Campana Coffee Factory, Inc. vs.
Kaisahan ng mga Manggagawa sa La Campana, L-5677, May 25, 1953). For
this reason, it may not be used or invoked for ends subversive of the policy and
purpose behind its creation (Emiliano Cano Enterprises, Inc. vs. CIR, L-20502,
Feb. 26, 1965) or which could not have been intended by law to which it owes
its being McConnel vs. Court of Appeals, L- 10510, March 17, 1961, 1 SCRA
722). This is particularly true where the fiction is used to defeat public
convenience, justify wrong, protect fraud, defend crime (Yutivo Sons Hardware
Company vs. Court of Tax Appeals, L-13203, Jan. 28, 1961, 1 SCRA 160),
confuse legitimate legal or judicial issues (R. F. Sugay & Co. vs. Reyes, L20451, Dec. 28, 1964), perpetrate deception or otherwise circumvent the law
(Gregorio Araneta, Inc. vs. reason de Paterno, L-2886, Aug. 22, 1952, 49 O.G.
721). This is likewise true where the corporate entity is being used as an alter
ego, adjunct, or business conduit for the sole benefit of the stockholders or of
another corporate entity (McConnel vs. Court of Appeals, supra; Commissioner
of Internal Revenue vs. Norton Harrison Co., L-7618, Aug. 31, 1964).
In any of these cases, the notion of corporate entity will be pierced or
disregarded, and the corporation will be treated merely as an association of
persons or, where there are two corporations, they will be merged as one, the
one being merely regarded as part or the instrumentality of the otter (Koppel
[Phil.] Inc. vs. Yatco, 77 Phil. 496, Yutivo Sons Hardware Company vs. Court
of Tax Appeals, supra).
So must the case at bar add to this jurisprudence. An indubitable deduction
from the findings of the trial court cannot but lead to the conclusion that the
business of the corporation is largely, if not wholly, the personal venture of
Forrest L. Cease. There is not even a shadow of a showing that his children
were subscribers or purchasers of the stocks they own. Their participation as
nominal shareholders emanated solely from Forrest L. Cease's gratuitous dole
out of his own shares to the benefit of his children and ultimately his family.
Were we sustain the theory of petitioners that the trial court acted in excess of
jurisdiction or abuse of discretion amounting to lack of jurisdiction in deciding
Civil Case No. 6326 as a case for partition when the defendant therein, Tiaong
Milling and Plantation Company, Inc. as registered owner asserted ownership
of the assets and properties involved in the litigation, which theory must
necessarily be based on the assumption that said assets and properties of
Tiaong Milling and Plantation Company, Inc. now appearing under the name of
F. L. Cease Plantation Company as Trustee are distinct and separate from the
estate of Forrest L. Cease to which petitioners and respondents as legal heirs
of said Forrest L. Cease are equally entitled share and share alike, then that
legal fiction of separate corporate personality shall have been used to delay
and ultimately deprive and defraud the respondents of their successional rights
to the estate of their deceased father. For Tiaong Milling and Plantation

Company shall have been able to extend its corporate existence beyond the
period of its charter which lapsed in June, 1958 under the guise and cover of F.
L, Cease Plantation Company, Inc. as Trustee which would be against the law,
and as Trustee shall have been able to use the assets and properties for the
benefit of the petitioners, to the great prejudice and defraudation. of private
respondents. Hence, it becomes necessary and imperative to pierce that
corporate veil.
Under the third assigned error, petitioners claim that the decision of the lower
court in the partition case is not interlocutory but rather final for it consists of
final and determinative dispositions of the contentions of the parties. We find
no merit in petitioners' stand.
Under the 1961 pronouncement and ruling of the Supreme Court in Vda. de
Zaldarriaga vs. Enriquez, 1 SCRA 1188 (and the sequel case of Vda. de
Zaldarriaga vs. Zaldarriaga, 2 SCRA 356), the lower court's dismissal of
petitioners' proposed appeal from its December 27, 1969 judgment as affirmed
by the Court of Appeals on the ground of prematurity in that the judgment was
not final but interlocutory was in order. As was said in said case:
It is true that in Africa vs. Africa, 42 Phil. 934 and other cases it
was held - contrary to the rule laid down in Ron vs. Mojica, 8
Phil. 328; Rodriguez vs. Ravilan, 17 Phil. 63 - that in a partition
case where defendant relies on the defense of exclusive
ownership, the action becomes one for title and the decision or
order directing partition is final, but the ruling to this effect has
been expressly reversed in the Fuentebella case which, in our
opinion, expresses the correct view, considering that a
decision or order directing partition is not final because it
leaves something more to be done in the trial court for the
complete disposition of the case, namely, the appointment of
commissioners, the proceedings to be had before them, the
submission of their report which, according to law, must be set
for hearing. In fact, it is only after said hearing that the court
may render a final judgment finally disposing of the action
(Rule 71, section 7, Rules of Court). (1 SCRA at page 1193).
It should be noted, however, that the said ruling in Zaldarriaga as based on
Fuentebella vs. Carrascoso, XIV Lawyers Journal 305 (May 27, 1942), has
been expressly abandoned by the Court in Miranda vs. Court of Appeals, 71
SCRA 295; 331-333 (June 18, 1976) wherein Mr. Justice Teehankee, speaking
for the Court, laid down the following doctrine:
The Court, however, deems it proper for the guidance of the
bench and bar to now declare as is clearly indicated from the
compelling reasons and considerations hereinabove stated:

- that the Court considers the better rule to be that stated in H.

E. Heacock Co. vs. American Trading Co., to wit, that where
the primary purpose of a case is to ascertain and determine
who between plaintiff and defendant is the true owner and
entitled to the exclusive use of the disputed property, "the
judgment . . . rendered by the lower court [is] a judgment on
the merits as to those questions, and [that] the order of the
court for an accounting was based upon, and is incidental to
the judgment on the merits. That is to say, that the judgment . .
. [is] a final judgment ... that in this kind of a case an
accounting is a mere incident to the judgment; that an appeal
lies from the rendition of the judgment as rendered ... "(as is
widely held by a great number of judges and members of the
bar, as shown by the cases so decided and filed and still
pending with the Court) for the fundamental reasons therein
stated that "this is more in harmony with the administration of
justice and the spirit and intent of the [Rules]. If on appeal the
judgment of the lower court is affirmed, it would not in the least
work an injustice to any of the legal rights of [appellee]. On the
other hand, if for any reason this court should reverse the
judgment of the lower court, the accounting would be a waste
of time and money, and might work a material injury to the
[appellant]; and
- that accordingly, the contrary ruling in Fuentebella vs.
Carrascoso which expressly reversed the Heacock case and a
line of similar decisions and ruled that such a decision for
recovery of property with accounting "is not final but merely
interlocutory and therefore not appealable" and subsequent
cases adhering to the same must be now in turn abandoned
and set aside.
Fuentebella adopted instead the opposite line of conflicting
decisions mostly in partition proceedings and exemplified by
Ron vs. Mojica 8 Phil. 928 (under the old Code of Civil
Procedure) that an order for partition of real property is not
final and appealable until after the actual partition of the
property as reported by the court appointed commissioners
and approved by the court in its judgment accepting the report.
lt must be especially noted that such rule governing partitions
is now so expressly provided and spelled out in Rule 69 of the
Rules of Court, with special reference to Sections 1, 2, 3, 6, 7
and 11, to wit, that there must first be a preliminar, order for
partition of the real estate (section 2) and where the parties-coowners cannot agree, the court appointed commissioners
make a plan of actual partition which must first be passed
upon and accepted by the trial court and embodied in a

judgment to be rendered by it (sections 6 and 11). In partition

cases, it must be further borne in mind that Rule 69, section 1
refers to "a person having the right to compel the partition of
real estate," so that the general rule of partition that an appeal
will not lie until the partition or distribution proceedings are
terminated will not apply where appellant claims exclusive
ownership of the whole property and denies the adverse
party's right to any partition, as was the ruling in Villanueva vs.
Capistrano and Africa vs .Africa, supra, Fuentebellas express
rehearsal of these cases must likewise be deemed now also
abandoned in view of the Court's expressed preference for the
rationale of the Heacock case.
The Court's considered opinion is that imperative
considerations of public policy and of sound practice in the
courts and adherence to the constitutional mandate of
simplified, just, speedy and inexpensive determination of every
action call for considering such judgments for recovery of
property with accounting as final judgments which are duly
appealable (and would therefore become final and executory if
not appealed within the reglementary period) with the
accounting as a mere incident of the judgment to be rendered
during the course of the appeal as provided in Rule 39, section
4 or to be implemented at the execution stage upon final
affirmance on appeal of the judgment (as in Court of Industrial
Relations unfair labor practice cases ordering the
reinstatement of the worker with accounting, computation and
payment of his backwages less earnings elsewhere during his
layoff) and that the only reason given in Fuentebelia for the
contrary ruling, viz, "the general harm that would follow from
throwing the door open to multiplicity of appeals in a single
case" of lesser import and consequence. (Emphasis copied).
The miranda ruling has since then been applied as the new rule by a
unanimous Court in Valdez vs. Bagasao, 82 SCRA 22 (March 8, 1978).
If there were a valid genuine claim of Exclusive ownership of the inherited
properties on the part of petitioners to respondents' action for partition, then
under the Miranda ruling, petitioners would be sustained, for as expressly held
therein " the general rule of partition that an appeal will not lie until the partition
or distribution proceedings are terminated will not apply where appellant claims
exclusive ownership of the whole property and denies the adverse party's right
to any partition."
But this question has now been rendered moot and academic for the very
issue of exclusive ownership claimed by petitioners to deny and defeat
respondents' right to partition - which is the very core of their rejected appeal -

has been squarely resolved herein against them, as if the appeal had been
given due course. The Court has herein expressly sustained the trial court's
findings, as affirmed by the Court of Appeals, that the assets or properties of
the defunct company constitute the estate of the deceased proprietor (supra at
page 7) and the defunct company's assertion of ownership of the properties is
a legal contradiction and would but thwart the liquidation and final distribution
and partition of the properties among the parties hereof as children of their
deceased father Forrest L. Cease. There is therefore no further hindrance to
effect the partition of the properties among the parties in implementation of the
appealed judgment.
One last consideration. Parties are brothers and sisters, legal heirs of their
deceased father, Forrest L. Cease. By all rights in law and jurisprudence, each
is entitled to share and share alike in the estate, which the trial court correctly
ordained and sustained by the appellate court. Almost 20 years have lapsed
since the filing of Special Proceedings No. 3893 for the administration of the
Estate of Forrest L. Cease and Civil Case No. 6326 for liquidation and partition
of the assets of the defunct Tiaong Milling and Plantation Co., Inc. A
succession of receivers were appointed by the court to take, keep in
possession, preserve and manage properties of the corporation which at one
time showed an income of P386,152.90 and expenses of P308,405.01 for the
period covering January 1, 1960 to August 31, 1967 as per Summary of
Operations of Commissioner for Finance appointed by the Court (Brief for
Respondents, p. 38). In the meantime, ejectment cases were filed by and
against the heirs in connection with the properties involved, aggravating the
already strained relations of the parties. A prudent and practical realization of
these circumstances ought and must constrain the parties to give each one his
due in law and with fairness and dispatch that their basic rights be enjoyed.
And by remanding this case to the court a quo for the actual partition of the
properties, the substantial rights of everyone of the heirs have not been
impaired, for in fact, they have been preserved and maintained.
WHEREFORE, IN VIEW OF THE FOREGOING, the judgment appealed from
is hereby AFFIRMED with costs against the petitioners.
SO ORDERED.
Teehankee, Actg. C.J., (Chairman), Makasiar, Fernandez, De Castro and
Melencio-Herrera, JJ., concur.

when the agency agreement was terminated and a management agreement

between the parties was entered into. The management agreement provided
that Norton would sell concrete blocks for Jackbilt, for a fixed monthly fee of
P2,000.00, which was later increased to P5,000.00.
G.R. No. L-17618

August 31, 1964

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
NORTON and HARRISON COMPANY, respondent.
Office of the Solicitor General for petitioner.
Pio Joven for respondent.
PAREDES, J.:
This is an appeal interposed by the Commissioner of Internal Revenue against
the following judgment of the Court of Tax Appeals:
IN VIEW OF THE FOREGOING, we find no legal basis to support the
assessment in question against petitioner. If at all, the assessment
should have been directed against JACKBILT, the manufacturer.
Accordingly, the decision appealed from is reversed, and the surety
bond filed to guarantee payment of said assessment is ordered
cancelled. No pronouncement as to costs.
Norton and Harrison is a corporation organized in 1911, (1) to buy and sell at
wholesale and retail, all kinds of goods, wares, and merchandise; (2) to act as
agents of manufacturers in the United States and foreign countries; and (3) to
carry on and conduct a general wholesale and retail mercantile establishment
in the Philippines. Jackbilt is, likewise, a corporation organized on February 16,
1948 primarily for the purpose of making, producing and manufacturing
concrete blocks. Under date of July 27, 1948. Norton and Jackbilt entered into
an agreement whereby Norton was made the sole and exclusive distributor of
concrete blocks manufactured by Jackbilt. Pursuant to this agreement,
whenever an order for concrete blocks was received by the Norton & Harrison
Co. from a customer, the order was transmitted to Jackbilt which delivered the
merchandise direct to the customer. Payment for the goods is, however, made
to Norton, which in turn pays Jackbilt the amount charged the customer less a
certain amount, as its compensation or profit. To exemplify the sales
procedures adopted by the Norton and Jackbilt, the following may be cited. In
the case of the sale of 420 pieces of concrete blocks to the American Builders
on April 1, 1952, the purchaser paid to Norton the sum of P189.00 the
purchase price. Out of this amount Norton paid Jackbilt P168.00, the difference
obviously being its compensation. As per records of Jackbilt, the transaction
was considered a sale to Norton. It was under this procedure that the sale of
concrete blocks manufactured by Jackbilt was conducted until May 1, 1953,

During the existence of the distribution or agency agreement, or on June 10,

1949, Norton & Harrison acquired by purchase all the outstanding shares of
stock of Jackbilt. Apparently, due to this transaction, the Commissioner of
Internal Revenue, after conducting an investigation, assessed the respondent
Norton & Harrison for deficiency sales tax and surcharges in the amount of
P32,662.90, making as basis thereof the sales of Norton to the Public. In other
words, the Commissioner considered the sale of Norton to the public as the
original sale and not the transaction from Jackbilt. The period covered by the
assessment was from July 1, 1949 to May 31, 1953. As Norton and Harrison
did not conform with the assessment, the matter was brought to the Court of
Tax Appeals.
The Commissioner of Internal Revenue contends that since Jackbilt was
owned and controlled by Norton & Harrison, the corporate personality of the
former (Jackbilt) should be disregarded for sales tax purposes, and the sale of
Jackbilt blocks by petitioner to the public must be considered as the original
sales from which the sales tax should be computed. The Norton & Harrison
Company contended otherwise that is, the transaction subject to tax is the
sale from Jackbilt to Norton.
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
The majority of the Tax Court, in relieving Norton & Harrison of liability under
the assessment, made the following observations:
The law applicable to the case is Section 186 of the National Internal
Revenue Code which imposes a percentage tax of 7% on every
original sale of goods, wares or merchandise, such tax to be based on
the gross selling price of such goods, wares or merchandise. The term
"original sale" has been defined as the first sale by every
manufacturer, producer or importer. (Sec. 5, Com. Act No. 503.)
Subsequent sales by persons other than the manufacturer, producer or
importer are not subject to the sales tax.
If JACKBILT actually sold concrete blocks manufactured by it to
petitioner under the distributorship or agency agreement of July 27,
1948, such sales constituted the original sales which are taxable under
Section 186 of the Revenue Code, while the sales made to the public

by petitioner are subsequent sales which are not taxable. But it

appears to us that there was no such sale by JACKBILT to petitioner.
Petitioner merely acted as agent for JACKBILT in the marketing of its
products. This is shown by the fact that petitioner merely accepted
orders from the public for the purchase of JACKBILT blocks. The
purchase orders were transmitted to JACKBILT which delivered the
blocks to the purchaser directly. There was no instance in which the
blocks ordered by the purchasers were delivered to the petitioner.
Petitioner never purchased concrete blocks from JACKBILT so that it
never acquired ownership of such concrete blocks. This being so,
petitioner could not have sold JACKBILT blocks for its own account. It
did so merely as agent of JACKBILT. The distributorship agreement of
July 27, 1948, is denominated by the parties themselves as an
"agency for marketing" JACKBILT products. ... .
xxx

xxx

xxx

Therefore, the taxable selling price of JACKBILT blocks under the

aforesaid agreement is the price charged to the public and not the
amount billed by JACKBILT to petitioner. The deficiency sales tax
should have been assessed against JACKBILT and not against
petitioner which merely acted as the former's agent.
xxx

xxx

xxx

Presiding Judge Nable of the same Court expressed a partial dissent, stating:
Upon the aforestated circumstances, which disclose Norton's control
over and direction of Jackbilt's affairs, the corporate personality of
Jackbilt should be disregarded, and the transactions between these
two corporations relative to the concrete blocks should be ignored in
determining the percentage tax for which Norton is liable.
Consequently, the percentage tax should be computed on the basis of
the sales of Jackbilt blocks to the public.
The majority opinion is now before Us on appeal by the Commissioner of
Internal Revenue, on four (4) assigned errors, all of which pose the following
propositions: (1) whether the acquisition of all the stocks of the Jackbilt by the
Norton & Harrison Co., merged the two corporations into a single corporation;
(2) whether the basis of the computation of the deficiency sales tax should be
the sale of the blocks to the public and not to Norton.
It has been settled that the ownership of all the stocks of a corporation by
another corporation does not necessarily breed an identity of corporate interest
between the two companies and be considered as a sufficient ground for
disregarding the distinct personalities (Liddell & Co., Inc. v. Coll. of Int. Rev. L-

9687, June 30, 1961). However, in the case at bar, we find sufficient grounds
to support the theory that the separate identities of the two companies should
be disregarded. Among these circumstances, which we find not successfully
refuted by appellee Norton are: (a) Norton and Harrison owned all the
outstanding stocks of Jackbilt; of the 15,000 authorized shares of Jackbilt on
March 31, 1958, 14,993 shares belonged to Norton and Harrison and one each
to seven others; (b) Norton constituted Jackbilt's board of directors in such a
way as to enable it to actually direct and manage the other's affairs by making
the same officers of the board for both companies. For instance, James E.
Norton is the President, Treasurer, Director and Stockholder of Norton. He also
occupies the same positions in Jackbilt corporation, the only change being, in
the Jackbilt, he is merely a nominal stockholder. The same is true with Mr.
Jordan, F. M. Domingo, Mr. Mantaring, Gilbert Golden and Gerardo Garcia,
while they are merely employees of the North they are Directors and nominal
stockholders of the Jackbilt (c) Norton financed the operations of the Jackbilt,
and this is shown by the fact that the loans obtained from the RFC and Bank of
America were used in the expansion program of Jackbilt, to pay advances for
the purchase of equipment, materials rations and salaries of employees of
Jackbilt and other sundry expenses. There was no limit to the advances given
to Jackbilt so much so that as of May 31, 1956, the unpaid advances
amounted to P757,652.45, which were not paid in cash by Jackbilt, but was
offset by shares of stock issued to Norton, the absolute and sole owner of
Jackbilt; (d) Norton treats Jackbilt employees as its own. Evidence shows that
Norton paid the salaries of Jackbilt employees and gave the same privileges as
Norton employees, an indication that Jackbilt employees were also Norton's
employees. Furthermore service rendered in any one of the two companies
were taken into account for purposes of promotion; (e) Compensation given to
board members of Jackbilt, indicate that Jackbilt is merely a department of
Norton. The income tax return of Norton for 1954 shows that as President and
Treasurer of Norton and Jackbilt, he received from Norton P56,929.95, but
received from Jackbilt the measly amount of P150.00, a circumstance which
points out that remuneration of purported officials of Jackbilt are deemed
included in the salaries they received from Norton. The same is true in the
case of Eduardo Garcia, an employee of Norton but a member of the Board of
Jackbilt. His Income tax return for 1956 reveals that he received from Norton in
salaries and bonuses P4,220.00, but received from Jackbilt, by way of
entertainment, representation, travelling and transportation allowances
P3,000.00. However, in the withholding statement (Exh. 28-A), it was shown
that the total of P4,200.00 and P3,000.00 (P7,220.00) was received by Garcia
from Norton, thus portraying the oneness of the two companies. The Income
Tax Returns of Albert Golden and Dioscoro Ramos both employees of Norton
but board members of Jackbilt, also disclose the game method of payment of
compensation and allowances. The offices of Norton and Jackbilt are located
in the same compound. Payments were effected by Norton of accounts for
Jackbilt and vice versa. Payments were also made to Norton of accounts due
or payable to Jackbilt and vice versa.

Norton and Harrison, while not denying the presence of the set up stated
above, tried to explain that the control over the affairs of Jackbilt was not made
in order to evade payment of taxes; that the loans obtained by it which were
given to Jackbilt, were necessary for the expansion of its business in the
manufacture of concrete blocks, which would ultimately benefit both
corporations; that the transactions and practices just mentioned, are not
unusual and extraordinary, but pursued in the regular course of business and
trade; that there could be no confusion in the present set up of the two
corporations, because they have separate Boards, their cash assets are
entirely and strictly separate; cashiers and official receipts and bank accounts
are distinct and different; they have separate income tax returns, separate
balance sheets and profit and loss statements. These explanations
notwithstanding an over-all appraisal of the circumstances presented by the
facts of the case, yields to the conclusion that the Jackbilt is merely an adjunct,
business conduit or alter ego, of Norton and Harrison and that the fiction of
corporate entities, separate and distinct from each, should be disregarded.
This is a case where the doctrine of piercing the veil of corporate fiction, should
be made to apply. In the case of Liddell & Co. Inc. v. Coll. of Int. Rev., supra, it
was held:
There are quite a series of conspicuous circumstances that militates
against the separate and distinct personality of Liddell Motors Inc.,
from Liddell & Co. We notice that the bulk of the business of Liddell &
Co. was channel Red through Liddell Motors, Inc. On the other hand,
Liddell Motors Inc. pursued no activities except to secure cars, trucks,
and spare parts from Liddell & Co., Inc. and then sell them to the
general public. These sales of vehicles by Liddell & Co, to Liddell
Motors. Inc. for the most part were shown to have taken place on the
same day that Liddell Motors, Inc. sold such vehicles to the public. We
may even say that the cars and trucks merely touched the hands of
Liddell Motors, Inc. as a matter of formality.
xxx

xxx

xxx

Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc.
are corporations owned and controlled by Frank Liddell directly or
indirectly is not by itself sufficient to justify the disregard of the
separate corporate identity of one from the other. There is however, in
this instant case, a peculiar sequence of the organization and activities
of Liddell Motors, Inc.
As opined in the case of Gregory v. Helvering "the legal right of a tax
payer to decrease the amount of what otherwise would be his taxes, or
altogether avoid them, by means which the law permits, cannot be
doubted". But as held in another case, "where a corporation is a
dummy, is unreal or a sham and serves no business purpose and is

intended only as a blind, the corporate form may be ignored for the law
cannot countenance a form that is bald and a mischievous fictions".
... a taxpayer may gain advantage of doing business thru a corporation
if he pleases, but the revenue officers in proper cases, may disregard
the separate corporate entity where it serves but as a shield for tax
evasion and treat the person who actually may take benefits of the
transactions as the person accordingly taxable.
... to allow a taxpayer to deny tax liability on the ground that the sales
were made through another and distinct corporation when it is proved
that the latter is virtually owned by the former or that they are
practically one and the same is to sanction a circumvention of our tax
laws. (and cases cited therein.)
In the case of Yutivo Sons Hardware Co. v. Court of Tax Appeals, L-13203,
Jan. 28, 1961, this Court made a similar ruling where the circumstances of
unity of corporate identities have been shown and which are identical to those
obtaining in the case under consideration. Therein, this Court said:
We are, however, inclined to agree with the court below that SM was
actually owned and controlled by petitioner as to make it a mere
subsidiary or branch of the latter created for the purpose of selling the
vehicles at retail (here concrete blocks) ... .
It may not be amiss to state in this connection, the advantages to Norton in
maintaining a semblance of separate entities. If the income of Norton should
be considered separate from the income of Jackbilt, then each would declare
such earning separately for income tax purposes and thus pay lesser income
tax. The combined taxable Norton-Jackbilt income would subject Norton to a
higher tax. Based upon the 1954-1955 income tax return of Norton and Jackbilt
(Exhs. 7 & 8), and assuming that both of them are operating on the same fiscal
basis and their returns are accurate, we would have the following result:
Jackbilt declared a taxable net income of P161,202.31 in which the income tax
due was computed at P37,137.00 (Exh. 8); whereas Norton declared as
taxable, a net income of P120,101.59, on which the income tax due was
computed at P25,628.00. The total of these liabilities is P50,764.84. On the
other hand, if the net taxable earnings of both corporations are combined,
during the same taxable year, the tax due on their total which is P281,303.90
would be P70,764.00. So that, even on the question of income tax alone, it
would be to the advantages of Norton that the corporations should be regarded
as separate entities.
WHEREFORE, the decision appealed from should be as it is hereby reversed
and another entered making the appellee Norton & Harrison liable for the
deficiency sales taxes assessed against it by the appellant Commissioner of

Internal Revenue, plus 25% surcharge thereon. Costs against appellee Norton
& Harrison.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes J.B.L., Regala and
Makalintal, JJ., concur.

G.R. No. 146667

January 23, 2007

JOHN F. McLEOD, Petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION (First Division), FILIPINAS
SYNTHETIC FIBER CORPORATION (FILSYN), FAR EASTERN TEXTILE
MILLS, INC., STA. ROSA TEXTILES, INC., (PEGGY MILLS, INC.),
PATRICIO L. LIM, and ERIC HU, Respondents.
DECISION
CARPIO, J.:
The Case
1

This is a petition for review to set aside the Decision dated 15 June 2000 and
3
the Resolution dated 27 December 2000 of the Court of Appeals in CA-G.R.
SP No. 55130. The Court of Appeals affirmed with modification the 29
4
December 1998 Decision of the National Labor Relations Commission (NLRC)
in NLRC NCR 02-00949-95.
The Facts
The facts, as summarized by the Labor Arbiter and adopted by the NLRC and
the Court of Appeals, are as follows:
On February 2, 1995, John F. McLeod filed a complaint for retirement benefits,
vacation and sick leave benefits, non-payment of unused airline tickets, holiday
pay, underpayment of salary and 13th month pay, moral and exemplary
damages, attorneys fees plus interest against Filipinas Synthetic Corporation
(Filsyn), Far Eastern Textile Mills, Inc., Sta. Rosa Textiles, Inc., Patricio Lim
and Eric Hu.
In his Position Paper, complainant alleged that he is an expert in textile
manufacturing process; that as early as 1956 he was hired as the Assistant

Spinning Manager of Universal Textiles, Inc. (UTEX); that he was promoted to

Senior Manager and worked for UTEX till 1980 under its President, respondent
Patricio Lim; that in 1978 Patricio Lim formed Peggy Mills, Inc. with respondent
Filsyn having controlling interest; that complainant was absorbed by Peggy
Mills as its Vice President and Plant Manager of the plant at Sta. Rosa,
Laguna; that at the time of his retirement complainant was receiving
P60,000.00 monthly with vacation and sick leave benefits; 13th month pay,
holiday pay and two round trip business class tickets on a Manila-LondonManila itinerary every three years which is convertible to cas[h] if unused; that
in January 1986, respondents failed to pay vacation and leave credits and
requested complainant to wait as it was short of funds but the same remain
unpaid at present; that complainant is entitled to such benefit as per CBA
provision (Annex "A"); that respondents likewise failed to pay complainants
holiday pay up to the present; that complainant is entitled to such benefits as
per CBA provision (Annex "B"); that in 1989 the plant union staged a strike and
in 1993 was found guilty of staging an illegal strike; that from 1989 to 1992
complainant was entitled to 4 round trip business class plane tickets on a
Manila-London-Manila itinerary but this benefit not (sic) its monetary equivalent
was not given; that on August 1990 the respondents reduced complainants
monthly salary of P60,000.00 by P9,900.00 till November 1993 or a period of
39 months; that in 1991 Filsyn sold Peggy Mills, Inc. to Far Eastern Textile
Mills, Inc. as per agreement (Annex "D") and this was renamed as Sta. Rosa
Textile with Patricio Lim as Chairman and President; that complainant worked
for Sta. Rosa until November 30 that from time to time the owners of Far
Eastern consulted with complainant on technical aspects of reoperation of the
plant as per correspondence (Annexes "D-1" and "D-2"); that when
complainant reached and applied retirement age at the end of 1993, he was
only given a reduced 13th month pay of P44,183.63, leaving a balance of
P15,816.87; that thereafter the owners of Far Eastern Textiles decided for
cessation of operations of Sta. Rosa Textiles; that on two occasions,
complainant wrote letters (Annexes "E-1" to "E-2") to Patricio Lim requesting
for his retirement and other benefits; that in the last quarter of 1994
respondents offered complainant compromise settlement of only P300,000.00
which complainant rejected; that again complainant wrote a letter (Annex "F")
reiterating his demand for full payment of all benefits and to no avail, hence
this complaint; and that he is entitled to all his money claims pursuant to law.
On the other hand, respondents in their Position Paper alleged that
complainant was the former Vice-President and Plant Manager of Peggy Mills,
Inc.; that he was hired in June 1980 and Peggy Mills closed operations due to
irreversible losses at the end of July 1992 but the corporation still exists at
present; that its assets were acquired by Sta. Rosa Textile Corporation which
was established in April 1992 but still remains non-operational at present; that
complainant was hired as consultant by Sta. Rosa Textile in November 1992
but he resigned on November 30, 1993; that Filsyn and Far Eastern Textiles
are separate legal entities and have no employer relationship with complainant;
that respondent Patricio Lim is the President and Board Chairman of Sta. Rosa

Textile Corporation; that respondent Eric Hu is a Taiwanese and is Director of

Sta. Rosa Textiles, Inc.; that complainant has no cause of action against
Filsyn, Far Eastern Textile Ltd., Sta. Rosa Textile Corporation and Eric Hu; that
Sta. Rosa only acquired the assets and not the liabilities of Peggy Mills, Inc.;
that Patricio Lim was only impleaded as Board Chairman of Sta. Rosa Textile
and not as private individual; that while complainant was Vice President and
Plant Manager of Peggy Mills, the union staged a strike up to July 1992
resulting in closure of operations due to irreversible losses as per Notice
(Annex "1"); that complainant was relied upon to settle the labor problem but
due to his lack of attention and absence the strike continued resulting in
closure of the company; and losses to Sta. Rosa which acquired its assets as
per their financial statements (Annexes "2" and "3"); that the attendance
records of complainant from April 1992 to November 1993 (Annexes "4" and
"5") show that he was either absent or worked at most two hours a day; that
Sta. Rosa and Peggy Mills are interposing counterclaims for damages in the
total amount of P36,757.00 against complainant; that complainants monthly
salary at Peggy Mills was P50,495.00 and not P60,000.00; that Peggy Mills,
does not have a retirement program; that whatever amount complainant is
entitled should be offset with the counterclaims; that complainant worked only
for 12 years from 1980 to 1992; that complainant was only hired as a
consultant and not an employee by Sta. Rosa Textile; that complainants
attendance record of absence and two hours daily work during the period of
the strike wipes out any vacation/sick leave he may have accumulated; that
there is no basis for complainants claim of two (2) business class airline
tickets; that complainants pay already included the holiday pay; that he is
entitled to holiday pay as consultant by Sta. Rosa; that he has waived this
benefit in his 12 years of work with Peggy Mills; that he is not entitled to 13th
month pay as consultant; and that he is not entitled to moral and exemplary
damages and attorneys fees.

was staged on the issue of CBA negotiations which is not part of the usual
duties and responsibilities as Plant Manager; that complainant is a British
national and is prohibited by law in engaging in union activities; that as per
Resolution (Annex "3") of the NLRC in the proper case, complainant testified in
favor of management; that the alleged attendance record of complainant was
lifted from the logbook of a security agency and is hearsay evidence; that in the
other attendance record it shows that complainant was reporting daily and
even on Saturdays; that his limited hours was due to the strike and cessation
of operations; that as plant manager complainant was on call 24 hours a day;
that respondents must pay complainant the unpaid portion of his salaries and
his retirement benefits that cash voucher No. 17015 (Annex "K") shows that
complainant drew the monthly salary of P60,000.00 which was reduced to
P50,495.00 in August 1990 and therefore without the consent of complainant;
that complainant was assured that he will be paid the deduction as soon as the
company improved its financial standing but this assurance was never fulfilled;
that Patricio Lim promised complainant his retirement pay as per the latters
letters (Annexes "E-1", "E-2" and "F"); that the law itself provides for retirement
benefits; that Patricio Lim by way of Memorandum (Annex "M") approved
vacation and sick leave benefits of 22 days per year effective 1986; that Peggy
Mills required monthly paid employees to sign an acknowledgement that their
monthly compensation includes holiday pay; that complainant was not made to
sign this undertaking precisely because he is entitled to holiday pay over and
above his monthly pay; that the company paid for complainants two (2) round
trip tickets to London in 1983 and 1986 as reflected in the complainants
passport (Annex "N"); that respondents claim that complainant is not entitled to
13th month pay but paid in 1993 and all the past 13 years; that complainant is
entitled to moral and exemplary damages and attorneys fees; that all doubts
must be resolved in favor of complainant; and that complainant reserved the
right to file perjury cases against those concerned.

In his Reply, complainant alleged that all respondents being one and the same
entities are solidarily liable for all salaries and benefits and complainant is
entitled to; that all respondents have the same address at 12/F B.A. Lepanto
Building, Makati City; that their counsel holds office in the same address; that
all respondents have the same offices and key personnel such as Patricio Lim
and Eric Hu; that respondents Position Paper is verified by Marialen C. Corpuz
who knows all the corporate officers of all respondents; that the veil of
corporate fiction may be pierced if it is used as a shield to perpetuate fraud and
confuse legitimate issues; that complainant never accepted the change in his
position from Vice-President and Plant Manger to consultant and it is
incumbent upon respondents to prove that he was only a consultant; that the
Deed of Dation in Payment with Lease (Annex "C") proves that Sta. Rosa took
over the assets of Peggy Mills as early as June 15, 1992 and not 1995 as
alleged by respondents; that complainant never resigned from his job but
applied for retirement as per letters (Annexes "E-1", "E-2" and "F"); that
documents "G", "H" and "I" show that Eric Hu is a top official of Peggy Mills that
the closure of Peggy Mills cannot be the fault of complainant; that the strike

In their Reply, respondents alleged that except for Peggy Mills, the other
respondents are not proper persons in interest due to the lack of employeremployee relationship between them and complainant; that undersigned
counsel does not represent Peggy Mills, Inc.
In a separate Position Paper, respondent Peggy Mills alleged that complainant
was hired on February 10, 1991 as per Board Minutes (Annex "A"); that on
August 19, 1987, the workers staged an illegal strike causing cessation of
operations on July 21, 1992; that respondent filed a Notice of Closure with the
DOLE (Annex "B"); that all employees were given separation pay except for
complainant whose task was extended to December 31, 1992 to wind up the
affairs of the company as per vouchers (Annexes "C" and "C-1"); that
respondent offered complainant his retirement benefits under RA 7641 but
complainant refused; that the regular salaries of complainant from closure up
to December 31, 1992 have offset whatever vacation and sick leaves he
accumulated; that his claim for unused plane tickets from 1989 to 1992 has no
policy basis, the companys formula of employees monthly rate x 314 days

over 12 months already included holiday pay; that complainants unpaid portion
of the 13th month pay in 1993 has no basis because he was only an employee
up to December 31, 1992; that the 13th month pay was based on his last
5
salary; and that complainant is not entitled to damages.
On 3 April 1998, the Labor Arbiter rendered his decision with the following
dispositive portion:
WHEREFORE, premises considered, We hold all respondents as jointly and
solidarily liable for complainants money claims as adjudicated above and
computed below as follows:
Retirement Benefits (one month salary for every year of service)
6/80 - 11/30/93 = 14 years

(To be converted in Peso upon payment)

$2,450.00 x 3.0 [yrs.].. $7,350.00
SO ORDERED.

Filipinas Synthetic Fiber Corporation (Filsyn), Far Eastern Textile Mills, Inc.
(FETMI), Sta. Rosa Textiles, Inc. (SRTI), Patricio L. Lim (Patricio), and Eric Hu
appealed to the NLRC. The NLRC rendered its decision on 29 December
1998, thus:
WHEREFORE, the Decision dated 3 April 1998 is hereby REVERSED and
SET ASIDE and a new one is entered ORDERING respondent Peggy Mills,
Inc. to pay complainant his retirement pay equivalent to 22.5 days for every
year of service for his twelve (12) years of service from 1980 to 1992 based on
a salary rate of P50,495.00 a month.

P60,000 x 14.0 mos. P840,000.00

All other claims are DISMISSED for lack of merit.
Vacation and Sick Leave (3 yrs.)
SO ORDERED.

P2,000.00 x 22 days x 3 yrs. 132,000.00

Underpayment of Salaries (3 yrs.)
P60,000 - P50,495 = P9,505
P 9,505 x 36.0 mos. ... 342,180.00
Holiday Pay (3 yrs.)
P2,000 x 30 days . 60,000.00
Underpayment of 13th month pay (1993) ... 15,816.87
Moral Damages .. 3,000,000.00
Exemplary Damages .. 1,000,000.00
10% Attorneys Fees . 138,999.68

John F. McLeod (McLeod) filed a motion for reconsideration which the NLRC
8
denied in its Resolution of 30 June 1999. McLeod thus filed a petition for
certiorari before the Court of Appeals assailing the decision and resolution of
9
the NLRC.
The Ruling of the Court of Appeals
On 15 June 2000, the Court of Appeals rendered judgment as follows:
WHEREFORE, the decision dated December 29, 1998 of the NLRC is hereby
AFFIRMED with the MODIFICATION that respondent Patricio Lim is jointly and
solidarily liable with Peggy Mills, Inc., to pay the following amounts to petitioner
John F. McLeod:
1. retirement pay equivalent to 22.5 days for every year of service for
his twelve (12) years of service from 1980 to 1992 based on a salary
rate of P50,495, a month;
2. moral damages in the amount of one hundred thousand
(P100,000.00) Pesos;

TOTAL P5,528,996.55
Unused Airline Tickets (3 yrs.)

3. exemplary damages in the amount of fifty thousand (P50,000.00)

Pesos; and

4. attorneys fees equivalent to 10% of the total award.

No costs is awarded.
SO ORDERED.

10

The Court of Appeals rejected McLeods theory that all respondent

corporations are the same corporate entity which should be held solidarily
liable for the payment of his monetary claims.
The Court of Appeals ruled that the fact that (1) all respondent corporations
have the same address; (2) all were represented by the same counsel, Atty.
Isidro S. Escano; (3) Atty. Escano holds office at respondent corporations
address; and (4) all respondent corporations have common officers and key
personnel, would not justify the application of the doctrine of piercing the veil of
corporate fiction.
The Court of Appeals held that there should be clear and convincing evidence
that SRTI, FETMI, and Filsyn were being used as alter ego, adjunct or
business conduit for the sole benefit of Peggy Mills, Inc. (PMI), otherwise, said
corporations should be treated as distinct and separate from each other.

entity. The Court of Appeals thus upheld the NLRCs finding that no employeremployee relationship existed between McLeod and respondent corporations
except PMI.
The Court of Appeals ruled that Eric Hu, as an officer of PMI, should be
exonerated from any liability, there being no proof of malice or bad faith on his
part. The Court of Appeals, however, ruled that McLeod was entitled to recover
from PMI and Patricio, the companys Chairman and President.
The Court of Appeals pointed out that Patricio deliberately and maliciously
evaded PMIs financial obligation to McLeod. The Court of Appeals stated that,
on several occasions, despite his approval, Patricio refused and ignored to pay
McLeods retirement benefits. The Court of Appeals stated that the delay
lasted for one year prompting McLeod to initiate legal action. The Court of
Appeals stated that although PMI offered to pay McLeod his retirement
benefits, this offer for P300,000 was still below the "floor limits" provided by
law. The Court of Appeals held that an employee could demand payment of
retirement benefits as a matter of right.
The Court of Appeals stated that considering that PMI was no longer in
operation, its "officer should be held liable for acting on behalf of the
corporation."

The Court of Appeals pointed out that the Articles of Incorporation of PMI show
that it has six incorporators, namely, Patricio, Jose Yulo, Jr., Carlos Palanca,
Jr., Cesar R. Concio, Jr., E. A. Picasso, and Walter Euyang. On the other
hand, the Articles of Incorporation of Filsyn show that it has 10 incorporators,
namely, Jesus Y. Yujuico, Carlos Palanca, Jr., Patricio, Ang Beng Uh, Ramon
A. Yulo, Honorio Poblador, Jr., Cipriano Azada, Manuel Tomacruz, Ismael
Maningas, and Benigno Zialcita, Jr.

The Court of Appeals also ruled that since PMI did not have a retirement
program providing for retirement benefits of its employees, Article 287 of the
Labor Code must be followed. The Court of Appeals thus upheld the NLRCs
finding that McLeod was entitled to retirement pay equivalent to 22.5 days for
every year of service from 1980 to 1992 based on a salary rate of P50,495 a
month.

The Court of Appeals pointed out that PMI and Filsyn have only two
interlocking incorporators and directors, namely, Patricio and Carlos Palanca,
Jr.

The Court of Appeals held that McLeod was not entitled to payment of
vacation, sick leave and holiday pay because as Vice President and Plant
Manager, McLeod is a managerial employee who, under Article 82 of the Labor
Code, is not entitled to these benefits.

11

Reiterating the ruling of this Court in Laguio v. NLRC, the Court of Appeals
held that mere substantial identity of the incorporators of two corporations does
not necessarily imply fraud, nor warrant the piercing of the veil of corporate
fiction.
The Court of Appeals also pointed out that when SRTI and PMI executed the
Dation in Payment with Lease, it was clear that SRTI did not assume the
liabilities PMI incurred before the execution of the contract.
The Court of Appeals held that McLeod failed to substantiate his claim that all
respondent corporations should be treated as one corporate

The Court of Appeals stated that for McLeod to be entitled to payment of

service incentive leave and holidays, there must be an agreement to that effect
between him and his employer.
Moreover, the Court of Appeals rejected McLeods argument that since PMI
paid for his two round-trip tickets Manila-London in 1983 and 1986, he was
also "entitled to unused airline tickets." The Court of Appeals stated that the
fact that PMI granted McLeod "free transport to and from Manila and London
for the year 1983 and 1986 does not ipso facto characterize it as regular that
would establish a prevailing company policy."

The Court of Appeals also denied McLeods claims for underpayment of

salaries and his 13th month pay for the year 1994. The Court of Appeals
upheld the NLRCs ruling that it could be deduced from McLeods own
narration of facts that he agreed to the reduction of his compensation from
P60,000 to P50,495 in August 1990 to November 1993.
The Court of Appeals found the award of moral damages for P50,000 in order
because of the "stubborn refusal" of PMI and Patricio to respect McLeods valid
claims.

The petition must fail.

McLeod asserts that the Court of Appeals should not have upheld the NLRCs
findings that he was a managerial employee of PMI from 20 June 1980 to 31
December 1992, and then a consultant of SRTI up to 30 November 1993.
McLeod asserts that if only for this "brazen assumption," the Court of Appeals
should not have sustained the NLRCs ruling that his cause of action was only
against PMI.
These assertions do not deserve serious consideration.

The Court of Appeals also ruled that attorneys fees equivalent to 10% of the
total award should be given to McLeod under Article 2208, paragraph 2 of the
12
Civil Code.
Hence, this petition.
The Issues
McLeod submits the following issues for our consideration:
1. Whether the challenged Decision and Resolution of the 14th
Division of the Court of Appeals promulgated on 15 June 2000 and 27
December 2000, respectively, in CA-G.R. SP No. 55130 are in accord
with law and jurisprudence;
2. Whether an employer-employee relationship exists between the
private respondents and the petitioner for purposes of determining
employer liability to the petitioner;
3. Whether the private respondents may avoid their financial
obligations to the petitioner by invoking the veil of corporate fiction;
4. Whether petitioner is entitled to the relief he seeks against the
private respondents;
5. Whether the ruling of [this] Court in Special Police and Watchman
Association (PLUM) Federation v. National Labor Relations
Commission cited by the Office of the Solicitor General is applicable to
the case of petitioner; and
6. Whether the appeal taken by the private respondents from the
Decision of the labor arbiter meets the mandatory requirements recited
13
in the Labor Code of the Philippines, as amended.
The Courts Ruling

14

Records disclose that McLeod was an employee only of PMI. PMI hired
15
McLeod as its acting Vice President and General Manager on 20 June 1980.
PMI confirmed McLeods appointment as Vice President/Plant Manager in the
16
Special Meeting of its Board of Directors on 10 February 1981. McLeod
himself testified during the hearing before the Labor Arbiter that his "regular
17
employment" was with PMI.
When PMIs rank-and-file employees staged a strike on 19 August 1989 to July
18
1992, PMI incurred serious business losses. This prompted PMI to stop
permanently plant operations and to send a notice of closure to the
19
Department of Labor and Employment on 21 July 1992.
20

PMI informed its employees, including McLeod, of the closure. PMI paid its
employees, including managerial employees, except McLeod, their unpaid
wages, sick leave, vacation leave, prorated 13th month pay, and separation
pay. Under the compromise agreement between PMI and its employees, the
21
employer-employee relationship between them ended on 25 November 1992.
Records also disclose that PMI extended McLeods service up to 31 December
22
1992 "to wind up some affairs" of the company. McLeod testified on cross23
examination that he received his last salary from PMI in December 1992.
It is thus clear that McLeod was a managerial employee of PMI from 20 June
1980 to 31 December 1992.
However, McLeod claims that after FETMI purchased PMI in January 1993, he
"continued to work at the same plant with the same responsibilities" until 30
November 1993. McLeod claims that FETMI merely renamed PMI as SRTI.
McLeod asserts that it was for this reason that when he reached the retirement
24
age in 1993, he asked all the respondents for the payment of his benefits.
These assertions deserve scant consideration.

What took place between PMI and SRTI was dation in payment with lease.
Pertinent portions of the contract that PMI and SRTI executed on 15 June 1992
read:

the selling corporation fraudulently enters into the transaction to escape liability
26
for those debts.
None of the foregoing exceptions is present in this case.

WHEREAS, PMI is indebted to the Development Bank of the Philippines

("DBP") and as security for such debts (the "Obligations") has mortgaged its
real properties covered by TCT Nos. T-38647, T-37136, and T-37135, together
with all machineries and improvements found thereat, a complete listing of
which is hereto attached as Annex "A" (the "Assets");
WHEREAS, by virtue of an inter-governmental agency arrangement, DBP
transferred the Obligations, including the Assets, to the Asset Privatization
Trust ("APT") and the latter has received payment for the Obligations from
PMI, under APTs Direct Debt Buy-Out ("DDBO") program thereby causing
APT to completely discharge and cancel the mortgage in the Assets and to
release the titles of the Assets back to PMI;
WHEREAS, PMI obtained cash advances from SRTC in the total amount of
TWO HUNDRED TEN MILLION PESOS (P210,000,000.00) (the "Advances")
to enable PMI to consummate the DDBO with APT, with SRTC subrogating
APT as PMIs creditor thereby;
WHEREAS, in payment to SRTC for PMIs liability, PMI has agreed to transfer
all its rights, title and interests in the Assets by way of a dation in payment to
SRTC, provided that simultaneous with the dation in payment, SRTC shall
grant unto PMI the right to lease the Assets under terms and conditions stated
hereunder;
xxxx
NOW THEREFORE, for and in consideration of the foregoing premises, and of
the terms and conditions hereinafter set forth, the parties hereby agree as
follows:
1. CESSION. In consideration of the amount of TWO HUNDRED TEN
MILLION PESOS (P210,000,000.00), PMI hereby cedes, conveys and
transfers to SRTC all of its rights, title and interest in and to the Assets by way
25
of a dation in payment. (Emphasis supplied)
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

Here, PMI transferred its assets to SRTI to settle its obligation to SRTI in the
sum of P210,000,000. We are not convinced that PMI fraudulently transferred
these assets to escape its liability for any of its debts. PMI had already paid its
employees, except McLeod, their money claims.
There was also no merger or consolidation of PMI and SRTI.
Consolidation is the union of two or more existing corporations to form a new
corporation called the consolidated corporation. It is a combination by
agreement between two or more corporations by which their rights, franchises,
and property are united and become those of a single, new corporation,
composed generally, although not necessarily, of the stockholders of the
original corporations.
Merger, on the other hand, is a union whereby one corporation absorbs one or
more existing corporations, and the absorbing corporation survives and
continues the combined business.
The parties to a merger or consolidation are called constituent corporations. In
consolidation, all the constituents are dissolved and absorbed by the new
consolidated enterprise. In merger, all constituents, except the surviving
corporation, are dissolved. In both cases, however, there is no liquidation of
the assets of the dissolved corporations, and the surviving or consolidated
corporation acquires all their properties, rights and franchises and their
stockholders usually become its stockholders.
The surviving or consolidated corporation assumes automatically the liabilities
of the dissolved corporations, regardless of whether the creditors have
27
consented or not to such merger or consolidation.
In the present case, there is no showing that the subject dation in payment
involved any corporate merger or consolidation. Neither is there any showing
of those indicative factors that SRTI is a mere instrumentality of PMI.
Moreover, SRTI did not expressly or impliedly agree to assume any of PMIs
debts. Pertinent portions of the subject Deed of Dation in Payment with Lease
provide, thus:
2. WARRANTIES AND REPRESENTATIONS. PMI hereby warrants and
represents the following:

xxxx

ATTY. ESCANO:

(e) PMI shall warrant that it will hold SRTC or its assigns, free and harmless
from any liability for claims of PMIs creditors, laborers, and workers and for
physical injury or injury to property arising from PMIs custody, possession,
care, repairs, maintenance, use or operation of the Assets except ordinary
28
wear and tear; (Emphasis supplied)

But the answer is still, there is no employment contract in your possession

appointing you in any capacity by Far Eastern?

Also, McLeod did not present any evidence to show the alleged renaming of
"Peggy Mills, Inc." to "Sta. Rosa Textiles, Inc."
Hence, it is not correct for McLeod to treat PMI and SRTI as the same entity.
Respondent corporations assert that SRTI hired McLeod as consultant after
29
PMI stopped operations. On the other hand, McLeod asserts that he was
30
respondent corporations employee from 1980 to 30 November 1993.
However, McLeod failed to present any proof of employer-employee
relationship between him and Filsyn, SRTI, or FETMI. McLeod testified, thus:

WITNESS:
There was no written contract, sir.
xxxx
ATTY. ESCANO:
So, there is proof that you were in fact really employed by Peggy Mills?
WITNESS:
Yes, sir.

ATTY. ESCANO:
ATTY. ESCANO:
Do you have any employment contract with Far Eastern Textile?
WITNESS:
It is my belief up the present time.
ATTY. AVECILLA:

Of course, my interest now is to whether or not there is a similar document to

present that you were employed by the other respondents like Filsyn
Corporation?
WITNESS:
I have no document, sir.

May I request that the witness be allowed to go through his Annexes, Your
Honor.

ATTY. ESCANO:

ATTY. ESCANO:

What about Far Eastern Textile Mills?

Yes, but I want a precise answer to that question. If he has an employment

contract with Far Eastern Textile?

WITNESS:
I have no document, sir.

WITNESS:
ATTY. ESCANO:
Can I answer it this way, sir? There is not a valid contract but I was under the
impression taking into consideration that the closeness that I had at Far
Eastern Textile is enough during that period of time of the development of
Peggy Mills to reorganize a staff. I was under the basic impression that they
might still retain my status as Vice President and Plant Manager of the
company.

And Sta. Rosa Textile Mills?

WITNESS:

31

There is no document, sir.

This assertion is untenable.

xxxx

A corporation is an artificial being invested by law with a personality separate

and distinct from that of its stockholders and from that of other corporations to
36
which it may be connected.

ATTY. ESCANO:
Q Yes. Let me be more specific, Mr. McLeod. Do you have a contract of
employment from Far Eastern Textiles, Inc.?
A No, sir.
Q What about Sta. Rosa Textile Mills, do you have an employment contract
from this company?
A No, sir.
xxxx

While a corporation may exist for any lawful purpose, the law will regard it as
an association of persons or, in case of two corporations, merge them into one,
when its corporate legal entity is used as a cloak for fraud or illegality. This is
the doctrine of piercing the veil of corporate fiction. The doctrine applies only
when such corporate fiction is used to defeat public convenience, justify wrong,
37
protect fraud, or defend crime, or when it is made as a shield to confuse the
legitimate issues, or where a corporation is the mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality,
38
agency, conduit or adjunct of another corporation.
To disregard the separate juridical personality of a corporation, the wrongdoing
39
must be established clearly and convincingly. It cannot be presumed.

Q And what about respondent Eric Hu. Have you had any contract of
employment from Mr. Eric Hu?
A Not a direct contract but I was taken in and I told to take over this from Mr.
Eric Hu. Automatically, it confirms that Mr. Eric Hu, in other words, was under
the control of Mr. Patricio Lim at that period of time.

Here, we do not find any of the evils sought to be prevented by the doctrine of
piercing the corporate veil.
Respondent corporations may be engaged in the same business as that of
PMI, but this fact alone is not enough reason to pierce the veil of corporate
40
fiction.

Q No documents to show, Mr. McLeod?

41

In Indophil Textile Mill Workers Union v. Calica, the Court ruled, thus:
A No. No documents, sir.

32

McLeod could have presented evidence to support his allegation of employeremployee relationship between him and any of Filsyn, SRTI, and FETMI, but
he did not. Appointment letters or employment contracts, payrolls, organization
charts, SSS registration, personnel list, as well as testimony of co-employees,
33
may serve as evidence of employee status.
It is a basic rule in evidence that parties must prove their affirmative
allegations. While technical rules are not strictly followed in the NLRC, this
does not mean that the rules on proving allegations are entirely ignored. Bare
allegations are not enough. They must be supported by substantial evidence at
34
the very least.
However, McLeod claims that "for purposes of determining employer liability,
all private respondents are one and the same employer" because: (1) they
have the same address; (2) they are all engaged in the same business; and (3)
35
they have interlocking directors and officers.

In the case at bar, petitioner seeks to pierce the veil of corporate entity of
Acrylic, alleging that the creation of the corporation is a devise to evade the
application of the CBA between petitioner Union and private respondent
Company. While we do not discount the possibility of the similarities of the
businesses of private respondent and Acrylic, neither are we inclined to apply
the doctrine invoked by petitioner in granting the relief sought. The fact that the
businesses of private respondent and Acrylic are related, that some of the
employees of the private respondent are the same persons manning and
providing for auxiliary services to the units of Acrylic, and that the physical
plants, offices and facilities are situated in the same compound, it is our
considered opinion that these facts are not sufficient to justify the piercing of
42
the corporate veil of Acrylic. (Emphasis supplied)
Also, the fact that SRTI and PMI shared the same address, i.e., 11/F BA43
Lepanto Bldg., Paseo de Roxas, Makati City, can be explained by the two
companies stipulation in their Deed of Dation in Payment with Lease that

"simultaneous with the dation in payment, SRTC shall grant unto PMI the right
44
to lease the Assets under terms and conditions stated hereunder."

people comprising it. The rule is that obligations incurred by the corporation,
56
acting through its directors, officers, and employees, are its sole liabilities.

As for the addresses of Filsyn and FETMI, Filsyn held office at 12th Floor, BA45
Lepanto Bldg., Paseo de Roxas, Makati City, while FETMI held office at 18F,
Tun Nan Commercial Building, 333 Tun Hwa South Road, Sec. 2, Taipei,
46
Taiwan, R.O.C. Hence, they did not have the same address as that of PMI.

Personal liability of corporate directors, trustees or officers attaches only when

(1) they assent to a patently unlawful act of the corporation, or when they are
guilty of bad faith or gross negligence in directing its affairs, or when there is a
conflict of interest resulting in damages to the corporation, its stockholders or
other persons; (2) they consent to the issuance of watered down stocks or
when, having knowledge of such issuance, do not forthwith file with the
corporate secretary their written objection; (3) they agree to hold themselves
personally and solidarily liable with the corporation; or (4) they are made by
57
specific provision of law personally answerable for their corporate action.

That respondent corporations have interlocking incorporators, directors, and

officers is of no moment.
The only interlocking incorporators of PMI and Filsyn were Patricio and Carlos
47
Palanca, Jr. While Patricio was Director and Board Chairman of Filsyn, SRTI,
48
and PMI, he was never an officer of FETMI.
Eric Hu, on the other hand, was Director of Filsyn and SRTI.
an officer of PMI.

49

He was never

50

Marialen C. Corpuz, Filsyns Finance Officer, testified on cross-examination

that (1) among all of Filsyns officers, only she was the one involved in the
management of PMI; (2) only she and Patricio were the common officers
between Filsyn and PMI; and (3) Filsyn and PMI are "two separate
51
companies."
Apolinario L. Posio, PMIs Chief Accountant, testified that "SRTI is a different
52
corporation from PMI."
At any rate, the existence of interlocking incorporators, directors, and officers is
not enough justification to pierce the veil of corporate fiction, in the absence of
53
fraud or other public policy considerations.

Considering that McLeod failed to prove any of the foregoing exceptions in the
present case, McLeod cannot hold Patricio solidarily liable with PMI.
The records are bereft of any evidence that Patricio acted with malice or bad
faith. Bad faith is a question of fact and is evidentiary. Bad faith does not
connote bad judgment or negligence. It imports a dishonest purpose or some
moral obliquity and conscious wrongdoing. It means breach of a known duty
58
through some ill motive or interest. It partakes of the nature of fraud.
In the present case, there is nothing substantial on record to show that Patricio
acted in bad faith in terminating McLeods services to warrant Patricios
personal liability. PMI had no other choice but to stop plant operations. The
work stoppage therefore was by necessity. The company could no longer
continue with its plant operations because of the serious business losses that it
had suffered. The mere fact that Patricio was president and director of PMI is
not a ground to conclude that he should be held solidarily liable with PMI for
McLeods money claims.
59

54

In Del Rosario v. NLRC, the Court ruled that substantial identity of the
incorporators of corporations does not necessarily imply fraud.
In light of the foregoing, and there being no proof of employer-employee
relationship between McLeod and respondent corporations and Eric Hu,
McLeods cause of action is only against his former employer, PMI.
On Patricios personal liability, it is settled that in the absence of malice, bad
faith, or specific provision of law, a stockholder or an officer of a corporation
55
cannot be made personally liable for corporate liabilities.
To reiterate, a corporation is a juridical entity with legal personality separate
and distinct from those acting for and in its behalf and, in general, from the

The ruling in A.C. Ransom Labor Union-CCLU v. NLRC, which the Court of
Appeals cited, does not apply to this case. We quote pertinent portions of the
ruling, thus:
(a) Article 265 of the Labor Code, in part, expressly provides:
"Any worker whose employment has been terminated as a consequence of an
unlawful lockout shall be entitled to reinstatement with full backwages."
Article 273 of the Code provides that:
"Any person violating any of the provisions of Article 265 of this Code shall be
punished by a fine of not exceeding five hundred pesos and/or imprisonment
for not less than one (1) day nor more than six (6) months."

(b) How can the foregoing provisions be implemented when the employer is a
corporation? The answer is found in Article 212 (c) of the Labor Code which
provides:
"(c) Employer includes any person acting in the interest of an employer,
directly or indirectly. The term shall not include any labor organization or any of
its officers or agents except when acting as employer.".
The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law.
Since RANSOM is an artificial person, it must have an officer who can be
presumed to be the employer, being the "person acting in the interest of (the)
employer" RANSOM. The corporation, only in the technical sense, is the
employer.
The responsible officer of an employer corporation can be held personally, not
to say even criminally, liable for non-payment of back wages. That is the policy
of the law.
xxxx
(c) If the policy of the law were otherwise, the corporation employer can have
devious ways for evading payment of back wages. In the instant case, it
would appear that RANSOM, in 1969, foreseeing the possibility or
probability of payment of back wages to the 22 strikers, organized
ROSARIO to replace RANSOM, with the latter to be eventually phased out
if the 22 strikers win their case. RANSOM actually ceased operations on
May 1, 1973, after the December 19, 1972 Decision of the Court of Industrial
60
Relations was promulgated against RANSOM. (Emphasis supplied)
Clearly, in A.C. Ransom, RANSOM, through its President, organized
ROSARIO to evade payment of backwages to the 22 strikers. This situation, or
anything similar showing malice or bad faith on the part of Patricio, does not
61
obtain in the present case. In Santos v. NLRC, the Court held, thus:
It is true, there were various cases when corporate officers were themselves
held by the Court to be personally accountable for the payment of wages and
money claims to its employees. In A.C. Ransom Labor Union-CCLU vs.
NLRC, for instance, the Court ruled that under the Minimum Wage Law, the
responsible officer of an employer corporation could be held personally liable
for nonpayment of backwages for "(i)f the policy of the law were otherwise, the
corporation employer (would) have devious ways for evading payment of
backwages." In the absence of a clear identification of the officer directly
responsible for failure to pay the backwages, the Court considered the
President of the corporation as such officer. The case was cited in Chua vs.
NLRC in holding personally liable the vice-president of the company, being the

highest and most ranking official of the corporation next to the President who
was dismissed for the latters claim for unpaid wages.
A review of the above exceptional cases would readily disclose the attendance
of facts and circumstances that could rightly sanction personal liability on the
part of the company officer. In A.C. Ransom, the corporate entity was a family
corporation and execution against it could not be implemented because of the
disposition posthaste of its leviable assets evidently in order to evade its just
and due obligations. The doctrine of "piercing the veil of corporate fiction" was
thus clearly appropriate. Chua likewise involved another family corporation,
and this time the conflict was between two brothers occupying the highest
ranking positions in the company. There were incontrovertible facts which
pointed to extreme personal animosity that resulted, evidently in bad faith, in
the easing out from the company of one of the brothers by the other.
The basic rule is still that which can be deduced from the Courts
pronouncement in Sunio vs. National Labor Relations Commission; thus:
We come now to the personal liability of petitioner, Sunio, who was made
jointly and severally responsible with petitioner company and CIPI for the
payment of the backwages of private respondents. This is reversible error. The
Assistant Regional Directors Decision failed to disclose the reason why he
was made personally liable. Respondents, however, alleged as grounds
thereof, his being the owner of one-half () interest of said corporation, and his
alleged arbitrary dismissal of private respondents.
Petitioner Sunio was impleaded in the Complaint in his capacity as General
Manager of petitioner corporation. There appears to be no evidence on record
that he acted maliciously or in bad faith in terminating the services of private
respondents. His act, therefore, was within the scope of his authority and was
a corporate act.
It is basic that a corporation is invested by law with a personality separate and
distinct from those of the persons composing it as well as 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. Petitioner Sunio, therefore, should not have been made
62
personally answerable for the payment of private respondents back salaries.
(Emphasis supplied)
Thus, the rule is still that the doctrine of piercing the corporate veil applies only
when the corporate fiction is used to defeat public convenience, justify wrong,
protect fraud, or defend crime. In the absence of malice, bad faith, or a specific
provision of law making a corporate officer liable, such corporate officer cannot
be made personally liable for corporate liabilities. Neither Article 212(c) nor

Article 273 (now 272) of the Labor Code expressly makes any corporate officer
personally liable for the debts of the corporation. As this Court ruled in H.L.
63
Carlos Construction, Inc. v. Marina Properties Corporation:
We concur with the CA that these two respondents are not liable. Section 31 of
the Corporation Code (Batas Pambansa Blg. 68) provides:
"Section 31. Liability of directors, trustees or officers. - Directors or trustees
who willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith ... shall be liable
jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders and other persons."
The personal liability of corporate officers validly attaches only when (a) they
assent to a patently unlawful act of the corporation; or (b) they are guilty of bad
faith or gross negligence in directing its affairs; or (c) they incur conflict of
interest, resulting in damages to the corporation, its stockholders or other
persons.
The records are bereft of any evidence that Typoco acted in bad faith with
gross or inexcusable negligence, or that he acted outside the scope of his
authority as company president. The unilateral termination of the Contract
during the existence of the TRO was indeed contemptible for which MPC
should have merely been cited for contempt of court at the most and a
preliminary injunction would have then stopped work by the second contractor.
Besides, there is no showing that the unilateral termination of the Contract was
64
null and void.
McLeod is not entitled to payment of vacation leave and sick leave as well as
to holiday pay. Article 82, Title I, Book Three of the Labor Code, on Working
Conditions and Rest Periods, provides:
Coverage. The provisions of this title shall apply to employees in all
establishments and undertakings whether for profit or not, but not to
government employees, managerial employees, field personnel, members of
the family of the employer who are dependent on him for support, domestic
helpers, persons in the personal service of another, and workers who are paid
by results as determined by the Secretary of Labor in appropriate regulations.
As used herein, "managerial employees" refer to those whose primary duty
consists of the management of the establishment in which they are employed
or of a department or subdivision thereof, and to other officers or members of
the managerial staff. (Emphasis supplied)
As Vice President/Plant Manager, McLeod is a managerial employee who is
excluded from the coverage of Title I, Book Three of the Labor Code. McLeod

is entitled to payment of vacation leave and sick leave only if he and PMI had
agreed on it. The payment of vacation leave and sick leave depends on the
policy of the employer or the agreement between the employer and
65
employee. In the present case, there is no showing that McLeod and PMI had
an agreement concerning payment of these benefits.
McLeods assertion of underpayment of his 13th month pay in December 1993
66
is unavailing. As already stated, PMI stopped plant operations in 1992.
McLeod himself testified that he received his last salary from PMI in December
1992. After the termination of the employer-employee relationship between
McLeod and PMI, SRTI hired McLeod as consultant and not as employee.
Since McLeod was no longer an employee, he was not entitled to the 13th
67
month pay. Besides, there is no evidence on record that McLeod indeed
received his alleged "reduced 13th month pay of P44,183.63" in December
68
1993.
Also unavailing is McLeods claim that he was entitled to the "unpaid monetary
equivalent of unused plane tickets for the period covering 1989 to 1992 in the
69
amount of P279,300.00." PMI has no company policy granting its officers and
70
employees expenses for trips abroad. That at one time PMI reimbursed
71
McLeod for his and his wifes plane tickets in a vacation to London could not
be deemed as an established practice considering that it happened only once.
To be considered a "regular practice," the giving of the benefits should have
been done over a long period, and must be shown to have been consistent and
72
deliberate.
In American Wire and Cable Daily Rated Employees Union v. American Wire
73
and Cable Co., Inc., the Court held that for a bonus to be enforceable, the
employer must have promised it, and the parties must have expressly agreed
upon it, or it must have had a fixed amount and had been a long and regular
practice on the part of the employer.
In the present case, there is no showing that PMI ever promised McLeod that it
would continue to grant him the benefit in question. Neither is there any proof
that PMI and McLeod had expressly agreed upon the giving of that benefit.
74

McLeods reliance on Annex M can hardly carry the day for him. Annex M,
which is McLeods letter addressed to "Philip Lim, VP Administration," merely
contains McLeods proposals for the grant of some benefits to supervisory and
confidential employees. Contrary to McLeods allegation, Patricio did not sign
the letter. Hence, the letter does not embody any agreement between McLeod
and the management that would entitle McLeod to his money claims.
75

Neither can McLeods assertions find support in Annex U. Annex U is the

Agreement which McLeod and Universal Textile Mills, Inc. executed in 1959.

The Agreement merely contains the renewal of the service agreement which
the parties signed in 1956.
McLeod cannot successfully pretend that his monthly salary of P60,000 was
reduced without his consent.

Q In other words, Mr. Witness, you mean to tell us that Mr. McLeod
continuously received the reduced amount of P50,000.00 by signing the
voucher and receiving the amount in question?
A Yes, sir.

McLeod testified that in 1990, Philip Lim explained to him why his salary would
have to be reduced. McLeod said that Philip told him that "they were short in
76
finances; that it would be repaid." Were McLeod not amenable to that
reduction in salary, he could have immediately resigned from his work in PMI.

Q As far as you remember, Mr. Posio, was there any complaint by Mr. McLeod
because of this reduced amount of his salary at that time?

McLeod knew that PMI was then suffering from serious business losses. In
fact, McLeod testified that PMI was not able to operate from August 1989 to
1992 because of the strike. Even before 1989, as Vice President of PMI,
77
McLeod was aware that the company had incurred "huge loans from DBP."
As it happened, McLeod continued to work with PMI. We find it pertinent to
quote some portions of Apolinario Posios testimony, to wit:

Q At least, that is in so far as you were concerned, he said nothing when he

signed the voucher in question?

Q You also stated that before the period of the strike as shown by annex "K" of
the reply filed by the complainant which was I think a voucher, the salary of Mr.
McLeod was roughly P60,000.00 a month?
A Yes, sir.
Q And as shown by their annex "L" to their reply, that this was reduced to
roughly P50,000.00 a month?
A Yes, sir.
Q You stated that this was indeed upon the instruction by the Vice-President of
Peggy Mills at that time and that was Mr. Philip Lim, would you not?
A Yes, sir.
Q Of your own personal knowledge, can you say if this was, in fact, by
agreement between Mr. Philip Lim or any other officers of Peggy Mills and Mr.
McLeod?
A If I recall it correctly, I assume it was an agreement, verbal agreement with,
between Mr. Philip Lim and Mr. McLeod, because the voucher that we
prepared was actually acknowledged by Mr. McLeod, the reduced amount was
acknowledged by Mr. McLeod thru the voucher that we prepared.

A I dont have any personal knowledge of any complaint, sir.

A Yes, sir.
Q Now, you also stated that the reason for what appears to be an agreement
between Peggy Mills and Mr. McLeod in so far as the reduction of his salary
from P60,000.00 to P50,000.00 a month was because he would have a
reduced number of working days in view of the strike at Peggy Mills, is that
right?
A Yes, sir.
Q And that this was so because on account of the strike, there was no work to
be done in the company?
A Yes, sir.

78

xxxx
Q Now, you also stated if you remember during the first time that you testified
that in the beginning, the monthly salary of the complainant was P60,000.00, is
that correct?
A Yes, sir.
Q And because of the long period of the strike, when there was no work to be
done, by agreement with the complainant, his monthly salary was adjusted to
only P50,495 because he would not have to report for work on Saturday. Do
you remember having made that explanation?
A Yes, sir.

Q You also stated that the complainant continuously received his monthly
salary in the adjusted amount of P50,495.00 monthly signing the necessary
vouchers or pay slips for that without complaining, is that not right, Mr. Posio?
A Yes, sir.

79

Since the last salary that McLeod received from PMI was P50,495, that amount
should be the basis in computing his retirement benefits. McLeod must be
credited only with his service to PMI as it had a juridical personality separate
and distinct from that of the other respondent corporations.
80

Since PMI has no retirement plan, we apply Section 5, Rule II of the Rules
Implementing the New Retirement Law which provides:
5.1 In the absence of an applicable agreement or retirement plan, an employee
who retires pursuant to the Act shall be entitled to retirement pay equivalent to
at least one-half (1/2) month salary for every year of service, a fraction of at
least six (6) months being considered as one whole year.
5.2 Components of One-half (1/2) Month Salary. For the purpose of
determining the minimum retirement pay due an employee under this Rule, the
term "one-half month salary" shall include all of the following:
(a) Fifteen (15) days salary of the employee based on his latest salary rate. x x
x

ATTY. ESCANO:
x x x According to your own statement in your Position Paper and I am
referring to page 8, your unpaid retirement benefit for fourteen (14) years of
service at P60,000.00 per year is P840,000.00, is that correct?
WITNESS:
That is correct, sir.
ATTY. ESCANO:
And this amount is correct P840,000.00, according to your Position Paper?
WITNESS:
That is correct, sir.
ATTY. ESCANO:
The question I want to ask is, are you aware that this amount was offered to
you sometime last year through your own lawyer, my good friend, Atty.
Avecilla, who is right here with us?
WITNESS:

With McLeod having worked with PMI for 12 years, from 1980 to 1992, he is
entitled to a retirement pay equivalent to month salary for every year of
service based on his latest salary rate of P50,495 a month.

I was aware, sir.

ATTY. ESCANO:

There is no basis for the award of moral damages.

So this was offered to you, is that correct?
Moral damages are recoverable only if the defendant has acted fraudulently or
in bad faith, or is guilty of gross negligence amounting to bad faith, or in
wanton disregard of his contractual obligations. The breach must be wanton,
81
reckless, malicious, or in bad faith, oppressive or abusive. From the records
of the case, the Court finds no ultimate facts to support a conclusion of bad
faith on the part of PMI.
Records disclose that PMI had long offered to pay McLeod his money claims.
In their Comment, respondents assert that they offered to pay McLeod the sum
of P840,000, as "separation benefits, and not P300,000, if only to buy peace
and to forestall any complaint" that McLeod may initiate before the NLRC.
McLeod admitted at the hearing before the Labor Arbiter that PMI has made
this offer

WITNESS:
I was told that a fixed sum of P840,000.00 was offered.
ATTY. ESCANO:
And , of course, the reason, if I may assume, that you declined this offer was
that, according to you, there are other claims which you would like to raise
against the Respondents which, by your impression, they were not willing to
pay in addition to this particular amount?
WITNESS:

Yes, sir.
ATTY. ESCANO:
The question now is, if the same amount is offered to you by way of retirement
which is exactly what you stated in your own Position Paper, would you accept
it or not?
WITNESS:
Not on the concept without all the basic benefits due me, I will refuse.

82

xxxx
ATTY. ROXAS:
Q You mentioned in the cross-examination of Atty. Escano that you were
offered the separation pay in 1994, is that correct, Mr. Witness?

A During that period in time, while the petition in this case was ongoing, we
already filed a case at that period of time, sir. There was a discussion. To the
best of my knowledge, they are willing to settle for P840,000.00 and based on
what the Attorney told me, I refused to accept because I believe that my
position was not in anyway due to a compromise situation to the benefits I am
83
entitled to.
Hence, the awards for exemplary damages and attorneys fees are not proper
84
in the present case.
That respondent corporations, in their appeal to the NLRC, did not serve a
copy of their memorandum of appeal upon PMI is of no moment. Section 3(a),
Rule VI of the NLRC New Rules of Procedure provides:
Requisites for Perfection of Appeal. (a) The appeal shall be filed within the
reglementary period as provided in Section 1 of this Rule; shall be under oath
with proof of payment of the required appeal fee and the posting of a cash or
surety bond as provided in Section 5 of this Rule; shall be accompanied by a
memorandum of appeal x x x and proof of service on the other party of such
appeal. (Emphasis supplied)

WITNESS:
A I was offered a settlement of P300,000.00 for complete settlement and that
was I think in January or February 1994, sir.
ATTY. ESCANO:
No. What was mentioned was the amount of P840,000.00.

The "other party" mentioned in the Rule obviously refers to the adverse party,
in this case, McLeod. Besides, Section 3, Rule VI of the Rules which requires,
among others, proof of service of the memorandum of appeal on the other
party, is merely a rundown of the contents of the required memorandum of
appeal to be submitted by the appellant. These are not jurisdictional
85
requirements.

ATTY. ESCANO:

WHEREFORE, we DENY the petition and AFFIRM the Decision of the Court of
Appeals in CA-G.R. SP No. 55130, with the following MODIFICATIONS: (a)
the retirement pay of John F. McLeod should be computed at month salary
for every year of service for 12 years based on his salary rate of P50,495 a
month; (b) Patricio L. Lim is absolved from personal liability; and (c) the awards
for moral and exemplary damages and attorneys fees are deleted. No
pronouncement as to costs.

The amount that I mentioned was P840,000.00 corresponding to the . . . . . . .

SO ORDERED.

WITNESS:

ANTONIO T. CARPIO
Associate Justice

WITNESS:
What did you say, Atty. Escano?

May I ask that the question be clarified, your Honor?

ATTY. ROXAS:
Q You mentioned that you were offered for the settlement of your claims in
1994 for P840,000.00, is that right, Mr. Witness?

RELOVA, J:
In this petition for review on certiorari, petitioners seek to reverse and/or modify
the decision, dated July 30, 1981, of respondent Court of Appeals affirming the
decision of the trial court, as well as the resolution, dated August 20, 1982,
denying the motion for reconsideration.
The facts of the case as aptly synthesized and adopted in toto by the
respondent appellate court are as follows:
Defendant Francisco de Asis & Co., Inc. was organized
sometime in 1967 with Francisco de Asis as its president and
Leocadio de Asis as one of the members of the Board of
Directors, As a stock brokerage company, it did business in
the Makati Stock Exchange wherein one becomes a member
upon the execution of an undertaking by at least 2 members of
its Board of Directors who own 95% of the stocks to answer
solidarily for the corporation liabilities of the member company.
Leocadio de Asis and Francisco de Asis who owned 95% of
the outstanding capital stock of the Francisco de Asis & Co.,
Inc. executed a joint and several undertaking on July 25, 1967
wherein they jointly and severally warrant the equitable
payment of all valid and legitimate corporate liabilities of
Francisco de Asis & Co., Inc. in connection with its
membership in the Makati Stock Exchange (Exhibits A, A-1,
and A-2).

G.R. No. L-61549

May 27, 1985

FRANCISCO DE ASIS & CO., INC., FRANCISCO DE ASIS and LEOCADIO

DE ASIS, petitioners,
vs.
THE COURT OF APPEALS, and MERCEDES PRIETO DELGADO,
respondents.
Cruz, Durian, Agabin, Atienza & Alday for petitioners.
Efren C. Carag for private respondent.

Sometime in June, 1970 the defendant company thru its

president Francisco de Asis approached Mrs. Mercedes P.
Delgado for assistance to secure a loan in the amount of
P200,000.00 from the Resource & Finance Corporation. Since
Francisco de Asis was a good friend and his father Leocadio
de Asis was solvent and answerable in a joint and solidarily
undertaking of the company, she agreed to raise the amount of
P200,000.00 as requested. She was able to secure
P100,000.00 from the Resource and Finance Corporation for
which she executed a promissory note (Exhibit F) and the
amount of P100,000.00 from her brother Benito Prieto, Jr. With
this amount, she deposited it in the Bank of Asia, Makati
Branch in favor of Francisco de Asis & Co., Inc. under current
account of 2-001, in accordance with the instructions of its
President Francisco de Asis (Exhibit B). Thereafter, on or
about August, 1973 Francisco de Asis informed her that he
had P100,000.00 to be made as partial payment of their loan
and suggested that she invest it by buying shares of Philex
Mining. To this suggestion, she agreed. Unfortunately, this
supposed partial payment which was to be invested in shares

of Philex was not carried out because Francisco de Asis & Co.,
Inc. was suspended by the Makati Stock Exchange from
trading, As a result, there was a rush of claims against the
company resulting in its collapse. She Called up Mr. Asis to
settle the loan and she was assured of settlement as Mr.
Leocadio de Asis is solvent and answerable for the debts of
the company. Mr. de Asis even sent her a cable assuring her
that the loan would be settled (Exhibits C and C-1). This loan
she extended to Francisco de Asis & Co., Inc. remained
unpaid. On the other hand, she had been paying on her own
the loan with the Resource & Finance Corp. as well as with her
brother Benito Prieto, Jr. She is married but separated from
her husband.
On the part of the defendants only Leocadio de Asis testified.
His testimony substantially established that he is a lawyer and
had fully understood the effects and circumstances of
executing the joint and several undertaking, Exhibit A, which
was made in accomodation to his son Francisco de Asis. He
was a nominal stockholder of the Francisco de Asis & Co., Inc.
of which 97% of the subscribed capital belong to his son
Francisco while the remaining 3% was subscribed by him This
joint and several undertaking, Exhibit A, was to answer for
obligation in favor of the Makati Stock Exchange in connection
with the operation of said exchange and not in favor of any
other party (Exhibit I). He was compelled to execute this joint
and several undertaking which in his opinion is null and void
especially considering that a nominal stock member like
himself wig be held liable because no license will be issued
unless this condition is first satisfied. He was an original
Director of the defendant corporation and at one time chairman
of the board for a short period. He ceased to be an officer of
this corporation sometime in 1970. He had no direct
participation in the management of the corporation to attend
the board meetings. The corporation had never pass any
resolution authorizing Francisco de Asis to secure a loan of
P200,000.00 from Mercedes P. Delgado. As a matter of fact,
he had no knowledge of this transaction except when the
instant suit was filed. (pp. 34-37, Record on Appeal). (pages
30-32, Rollo).
Petitioners raised the same assignments of errors presented and passed upon
by the appellate court that the latter erred (1) in declaring that the obligation
sued upon was corporate loan of Francisco de Asis and Co., Inc. and not a
personal loan of Francisco de Asis with the private respondent; and (2) in
holding petitioner Leocadio de Asis liable, jointly and severally, with petitioners

Francisco de Asis and Francisco de Asis & Co., Inc. under the "Joint and
Several Undertakings."
WE do not agree.
The records are negative of any evidence which would show that the corporate
nature of the transaction alleged in paragraphs 4 and 8 of the complaint which
read:
4. Sometime in June of 1970, defendant, Francisco de Asis
approached plaintiff, who was a good friend, and informed her
that he was in need of P200,000.00 because the stock
brokerage firm bearing his name, defendant Francisco de Asis
and Co., Inc. was encountering cash flow problems;
8. On July 2, 1970, plaintiff deposited the P200,000.00 to the
bank account of defendant corporation at the Bank of Asia,
Makati Branch (pages 32-33, Rollo).
have been denied and proved to be false. Thus, We are in affirmance of the
findings of respondent appellate court that
The necessity and urgency for the loan of P200,000.00 was
not to meet the personal need of Francisco de Asis as there is
no showing that he was in financial difficulties but to resolve
the cash flow problems of Francisco de Asis and Co., Inc. for
which plaintiff-appellee deposited the amount of P200,000.00
on July 2, 1970 in the current account of defendant corporation
at the Makati Branch of the Bank of Asia. Neither would the
absence of the usual documents, i.e., promissory notes and/or
real estate or chattel mortgages, negate the existence of the
loan. Considering the relationship between the parties, being
very good friends, plaintiff-appellee dispensed with the
customary documentation in her desire to bail out a friend from
the difficulties that his corporation is facing, 97% of the capital
stock of which he owned. But the loan of P200,000.00 is not
totally without any document. The deposit slip (Exhibit "B") of
the Bank of Asia showing the deposit of P200,000.00 on July
2, 1970, in Current Account No. 2-0017 of defendant
corporation indicates the receipt of said amount. And the
record is bereft of any evidence disclosing that said funds were
used other than for corporate purposes.
If the transaction contemplated by the parties herein is that of
a personal loan to Francisco de Asis, then plaintiff could have

simply written out a check in the latter's name or deposited the

amount of the loan in his personal account. (page 33, Rollo).

ACCORDINGLY, for lack of merit, the petition is hereby DISMISSED.

SO ORDERED.

The claim of the corporation that it had not authorized Francisco de Asis to
obtain loan for the company from the private respondent is belied by the fact
that upon deposit of the sum of P200,000.00 in its current account, it had
retained and disbursed the said amount. And, assuming that it had not really
authorized Francisco de Asis to borrow money from private respondent, the
company is still obliged to return the same under Article 2154 of the Civil Code
which provides:
If something is received when there is no right to demand it,
and it was unduly delivered through mistake, the obligation to
return it arises.
Relative to the argument that Francisco and Leocadio de Asis' liability under
their "Joint and Several Undertaking" is limited to the obligation of the
corporation in connection with its membership at the Makati Stock Exchange,
their liability is spelled out by Exhibit "A" as follows:
NOW, THEREFORE, for and in consideration of the foregoing
premises, the Owners hereby jointly and severally warrant the
equitable payment of all valid and legitimate corporate
liabilities of the Francisco de Asis & Co., Inc. in connection
with its membership at the Makati Stock Exchange Exhibit "A"
(page 33, Rollo).
The execution of the foregoing instrument is a requirement for membership in
the Makati Stock Exchange. Subdivision 2, Section 1 of Article XIII of the
Constitution of the Makati Stock Exchange clearly states:
that stockholders owning at least 95% of the outstanding
capital stock of the applicant corporation shall execute a public
instrument making themselves jointly and severally liable
without limitation for all the transactions and dealings of said
corporation and a copy of said document shall be filed with the
Commission provided, however, that if the 95% outstanding
capital stock is owned by only one person another stockholder
shall be required to execute with him the said public instrument
or guaranty. (page 34, Rollo), (Emphasis supplied).
And, as pointed out by respondent appellate court, "Leocadio and Francisco de
Asis knowingly and voluntarily executed and signed the Joint and Several
Undertaking, Exhibit "A" ". More so, in the case of Leocadio de Asis who is a
lawyer and, therefore, knew the legal import and far-reaching consequences of
the document he signed.

Gutierrez, Jr., De la Fuente and Alampay, JJ., concur.

Teehankee (Chairman), J., took no part.
Plana J., is on leave.

DECISION
CALLEJO, SR., J.:
1

Before us is a petition for review on certiorari of the Decision of the Court of

2
Appeals, in CA-G.R. CV No. 43985, modifying the Decision of the Regional
Trial Court of Kalookan City, Branch 122, in Civil Case No. C-10811.
The antecedents are as follows:
3

Respondent BPI International Finance is a foreign corporation not doing

business in the Philippines, with office address at the Bank of America Tower,
12 Harcourt Road, Central Hongkong. It was a deposit-taking company
organized and existing under and by virtue of the laws of Hongkong, and was
also engaged in investment banking operations therein.
Cintas Largas, Ltd. (CLL) was also a foreign corporation, established in
Hongkong, with a paid-up capital of HK$10,000. The registered shareholders
of the CLL in Hongkong were the Overseas Nominee, Ltd. and Shares
Nominee, Ltd., which were mainly nominee shareholders. In Hongkong, the
nominee shareholder of CLL was Baker & McKenzie Nominees, Ltd., a leading
solicitor firm. However, beneficially, the company was equally owned by
Messrs. Ramon Siy, Ricardo Lopa, Wilfrido C. Martinez, and Miguel J.
4
Lacson. The registered office address of CLL in Hongkong was 22/F, Princes
Building, also the office address of Price Waterhouse & Co., a large accounting
firm in Hongkong.
The bulk of the business of the CLL was the importation of molasses from the
Philippines, principally from the Mar Tierra Corporation, and the resale thereof
5
in the international market. However, Mar Tierra Corporation also sold
6
molasses to its customers. Wilfrido C. Martinez was the president of Mar
Tierra Corporation, while its executive vice-president was Blamar Gonzales.
The business operations of both the CLL and Mar Tierra Corporation were run
by Wilfrido Martinez and Gonzales.

G.R. No. 131673

September 10, 2004

*

RUBEN MARTINEZ, substituted by his heirs, MENA CONSTANTINO

MARTINEZ, WILFRIDO C. MARTINEZ, EMMA M. NAVA, and EDNA M.
SAKHRANI, petitioners,
vs.
COURT OF APPEALS and BPI INTERNATIONAL FINANCE, respondents.

About 42% of the capital stock of Mar Tierra Corporation was owned by RJL
Martinez Fishing Corporation (RJL), the leading tuna fishing outfit in the
Philippines. Petitioner Ruben Martinez was the president of RJL and a member
of the board of directors thereof. The majority stockholders of RJL were Ruben
Martinez and his brothers, Jose and Luis Martinez. Sixty-eight (68) percent of
the total assets of Ruben Martinez were in the RJL.
In 1979, respondent BPI International Finance (then AIFL) granted CLL a letter
of credit in the amount of US$3,000,000. Wilfrido Martinez signed the letter
agreement with the respondent for the CLL. The respondent and the CLL had
made the following arrangements:

Cintas Largas, Ltd. will purchase molasses from the Philippines,

mainly from Mar Tierra Corporation, and then sell the molasses to
foreign countries. Both the purchase of the molasses from the
Philippines and the subsequent sale thereof to foreign customers were
effected by means of Letters of Credit. A Letter of Credit would be
opened by Cintas Largas, Ltd. in favour of Mar Tierra Corporation or
any other seller in the Philippines. Upon the sale of the molasses to
foreign buyers, a Letter of Credit would then be opened by such
buyers, in favour of Cintas Largas, Ltd. The Letters of Credit were
effected through the Letter of Credit Facility of Cintas Largas, Ltd. in
plaintiff. The profits of Cintas Largas, Ltd. from these transactions were
then deposited in either the deposit account of Cintas Largas, Ltd. with
plaintiff or the Money Market Placement Account Nos. 063 and 084,
depending upon the instructions of Wilfrido C. Martinez and Blamar C.
7
Gonzales, principally.
On January 24, 1979, the CLL opened a money market placement with the
8
respondent bearing MMP No. 063, with an initial placement of US$390,000.
The CLL also opened and maintained a foreign currency account and a deposit
account with the respondent. The authorized signatory in both accounts of CLL
was Wilfrido C. Martinez. Some instructions also came from Gonzales, to be
9
confirmed by Wilfrido Martinez. On March 21, 1980, petitioner Ruben Martinez
and/or his son Wilfrido C. Martinez and/or Miguel J. Lacson affixed their
signatures on the two signature cards furnished by the respondent which
became MMP No. 063 and MMP No. 084. On the face of the cards, the
signatories became joint account holders of the said money market
10
placements.
On March 25, 1980, the CLL opened a money market placement account with
the respondent bearing MMP No. 084 with an initial placement of
11
US$68,768.60, transferred from MMP No. 063. At times, funds in MMP Nos.
063 and 084 were transferred to the CLLs deposit account, and vice versa.
On May 19, 1980, the CLL, through Wilfrido Martinez, and the respondent,
through Senen L. Matoto and Michael Sung, Senior Manager of the Money
Management Division of the respondent, executed a letter-agreement in which
the existing back-to-back credit facility granted to the CLL way back in 1979
was extended up to July 1980, and increased to US$5,000,000. The credit
facility was to be secured as follows:
SECURITY: (i) Back-to-Back L/C to be secured by an L/C issued, by
a bank acceptable to AFHK, in favor of Cintas Largas.
(ii) AFHK L/C issued prior to receipt of Backing L/C to be secured by
a 10% margin by way of a hold out on cash deposit with AFHK with
interest at LIBOR. The Backing L/C, however, shall be opened not
later than 120 days after the issuance of AFHKs L/C.

(iii) JSS of Messrs. Ramon Siy, Wilfrido C. Martinez, Ricardo Lopa and
Miguel J. Lacson for both of the above cases.
DOCUMENTATION: Standard AFHK L/C documentation.

12

The facility was designed to finance the purchases of molasses made by the
13
CLL from the Philippines for re-export.
In compliance with the letter-agreement, Wilfrido C. Martinez, Miguel J.
Lacson, Ricardo Lopa, and Ramon Siy executed a continuing suretyship
agreement in which they bound and obliged themselves, jointly and severally,
14
with the CLL to pay the latters obligation under the said credit facility.
As of September 26, 1980, the balance of the deposit account of the CLL with
15
the respondent was US$1,025,052.06. On the other hand, the balance of the
money placement in MMP No. 063, as of September 25, 1980 was
16
US$312,708.43, while the balance of the money market placement in MMP
17
No. 084 as of September 8, 1980 stood at US$768,258.24.
On October 10, 1980, Blamar Gonzales, acting for Mar Tierra Corporation,
sent to the respondent a telex confirming his telephone conversation with
Michael Sung/Bing Matoto requesting the respondent to transfer US$340,000
to Account No. FCD SA 18402-7, registered in the name of Mar Tierra
Corporation, Philippine Banking Corporation, Union Cement Building, Port
Area, Manila, as payee, with the following specific instructions: (a) there should
be no mention of Wilfrido Martinez or Mar Tierra Corporation; (b) the telex
instruction should be signed only by Wilfrido Martinez and sent only through
the telex machine of Mar Tierra Corporation; and, (c) the final confirmation of
18
the transfer should be made by telephone call. Gonzales requested the
respondent, in the same telex, to confirm its total available account so that
instructions on the transfer of the funds to FCD SA 18402-7 could be
19
formalized.
On October 13, 1980, Sung sent a telex to Gonzales informing the latter of the
balances of the MMP Nos. 063 and 084 and in the CLL account deposit, with
the corresponding maturity dates thereof, thus:
1. DETAIL OF PLACEMENT IN VARIOUS A/C.
MMP 063
VALUE
DATE
25/9/80

MATURITY
DATE
DATE
28/11/80

12-1/4

AMOUNT

MATURITY
VALUE

USD306,043.48

USD 312,708.43

MMP 084
25/09/80

28/11/80

12-1/4

USD751,883.88

USD 768,258.24
------------USD1080,966.67
==============

CINTAS LARGAS
VALUE
DATE

MATURITY
DATE

DATE

AMOUNT

MATURITY
VALUE

15/9/80 1 DAY CALL

10-7/8

USD 46,131.26

25/9/80 1 DAY CALL

11-1/4

USD500,000.00

(RATE ADJ: TO 12-1/4 VALUE 7/10/80)

26/9/80 31/10/80

12-1/4

USD420,831.45 USD 425,843.44

2. ACCORDING TO AIDC, O/S OF PESO LOAN IS 10,930,000.00,

AND THE HOLDOUT REQUIRED IS 120 PCT
COMPUTATION:

PESO
10,930,000.00
7.89 (EXCHANGE RATE)
1.20
(120
PCT)
----------------1,662,357.00
==========

3. ACCORDINGLY, THE FUND

20
USD340,000.00. PLS REVERT.

AVAILABLE

IS

APPROX.

Sung informed Gonzales that the account available was approximately

US$340,000, considering the CLL deposit account and the money market
21
placements. On October 14, 1980, the respondent received a telex from
Wilfrido C. Martinez requesting that the transfer of US$340,000 from the
deposit account of the CLL or any deposit available be effected by telegraphic
transfer as soon as possible to their account, payee FCD SA 18402-7,
22
Philippine Banking Corporation, Port Area, Manila. On October 21, 1980,
Wilfrido Martinez wrote the respondent confirming his request for the transfer
of US$340,000 to "their" account, FCD SA 18402-7, with the Philippine
Banking Corporation, through Wells Fargo Bank of New York, Philippine
23
Banking Corporation Account No. FCDU SA No. 003-019205.

The respondent complied with the request of the CLL, through Wilfrido
24
Martinez and Gonzales, and remitted US$340,000 as instructed. However,
instead of deducting the amount from the funds in the CLL foreign currency or
deposit accounts and/or MMP Nos. 063 and 084, the respondent merely
"posted" the US$340,000 as an account receivable of the CLL since, at that
25
time, the money market placements had not yet matured. When the money
market placements matured, however, the respondent did not collect the
US$340,000 therefrom. Instead, the respondent allowed the CLL and/or
Wilfrido C. Martinez to withdraw, up to July 3, 1981, the bulk of the CLL deposit
26
account and MMP Nos. 084 and 063;
hence, it failed to secure
reimbursement for the US$340,000 from the said deposit account and/or
money market placements.
In the meantime, problems ensued in the reconciliation of the transactions
involving the funds of the CLL, including the MMP Nos. 063 and 084 with the
respondent, as well as the receivables of Mar Tierra Corporation. There was
also a need to audit the said funds. Sometime in July 1982, conferences were
held between the executive committee of Mar Tierra Corporation and some of
its officers, including Miguel J. Lacson, where the means to reduce the
administrative expenses and accountants fees, and the possibility of placing
27
the CLL on an "inactive status" were discussed. The respondent pressured
the CLL, Wilfrido Martinez, and Gonzales to pay the US$340,000 it remitted to
28
Account No. FCD SA 18402-7. Eventually, Wilfrido C. Martinez and Blamar
Gonzales engaged the services of the auditing firm, the Jacinto, Belano,
Castro & Co., to review the flow of the CLLs funds and the receivables of Mar
Tierra Corporation.
On August 16, 1982, the CLL, through its certified public accountant, wrote the
respondent requesting the latter to furnish its accountant with a copy of the
29
financial report prepared by its auditors. An audit was, thereafter, conducted
by the Jacinto, Belano, Castro & Co., certified public accountants of the CLL
and Mar Tierra Corporation. Based on their report, the auditors found that the
30
CLL owed the respondent US$340,000.
In the meantime, the respondent demanded from the CLL, Wilfrido Martinez,
Lacson, Gonzales, and petitioner Ruben Martinez, the payment of the
US$340,000 remitted by it to FCD SA 18402-7, per instructions of Gonzales
and Wilfrido Martinez. No remittance was made to the respondent. Petitioner
Ruben Martinez denied knowledge of any such remittance, as well as any
liability for the amount thereof.
On June 17, 1983, the respondent filed a complaint against the CLL, Wilfrido
Martinez, Lacson, Gonzales, and petitioner Ruben Martinez, with the RTC of
Kaloocan City for the collection of the principal amount of US$340,000, with a
plea for a writ of preliminary attachment. Two alternative causes of action
against the defendants were alleged therein, viz:

FIRST ALTERNATIVE CAUSE OF ACTION

2.1 The allegations contained in the foregoing paragraphs are
repleaded herein by reference.
2.2 The remittance by plaintiff of the sum of US$340,000.00 as
previously explained in the foregoing paragraphs was made upon the
express instructions of defendants GONZALES and WILFRIDO C.
MARTINEZ acting for and in behalf of the defendant CINTAS,
defendants GONZALES and WILFRIDO C. MARTINEZ being the duly
authorized representatives of defendant CINTAS to transact any and
all of its business with plaintiff.
2.3 The remittance of US$340,000.00 was made under an agreement
for plaintiff to advance the said amount and for defendants
GONZALES, WILFRIDO C. MARTINEZ and CINTAS to repay plaintiff
all such monies so advanced to said defendants or to their order.
2.4 In making said remittance, plaintiff acted as the agent of the
foregoing defendants in meeting the latters liability to the recipient/s of
the amount so remitted.
2.5 The remittance of US$340,000.00 which remains unsettled to date
is a just, binding and lawful obligation of the defendants GONZALES,
WILFRIDO C. MARTINEZ and CINTAS.
2.6 Defendant CINTAS is a reinvoicing or paper company with
nominee shareholders in Hongkong. The real and beneficial
shareholders of the foregoing defendants are the defendants LACSON
and WILFRIDO C. MARTINEZ.
2.7 Defendant CINTAS is being used by the foregoing defendants as
an alter ego or business conduit for their sole benefit and/or to defeat
public convenience.
2.8 Defendant CINTAS, being a mere alter ego or business conduit for
the foregoing defendants, has no corporate personality distinct and
separate from that of its beneficial shareholders and, likewise, has no
substantial assets in its own name.
2.9 The remittance of US$340,000.00 as referred to previously,
although made upon the instructions of defendants GONZALES,
WILFRIDO C. MARTINEZ and CINTAS, was in fact a remittance made
for the benefit of the beneficial shareholders of defendant CINTAS.

2.10 Any and all obligations of defendant CINTAS are the obligations
of its beneficial shareholders since the former is being used by the
latter as an alter ego or business conduit for their sole benefit and/or to
defeat public convenience.
SECOND ALTERNATIVE CAUSE OF ACTION
3.1 The allegations contained in the foregoing paragraphs are
incorporated herein by reference.
3.2 Defendants RUBEN MARTINEZ, WILFRIDO C. MARTINEZ and
LACSON are joint account holders of Money Market Placement
Account Nos. 063 and 084 (hereinafter referred to as MMP 063 and
084 for brevity) opened and maintained by said defendants with the
plaintiff.
3.3 Said money market placement accounts, although nominally
opened and maintained by said defendants, were in reality for the
account and benefit of all the defendants.
3.4 Defendant CINTAS likewise opened and maintained a deposit
account with plaintiff.
3.5 Defendants W.C. Martinez and Gonzales upon giving instructions
to plaintiff to remit the amount of US$340,000.00 as previously
discussed also instructed plaintiff to reimburse itself from available
funds in MMP Account Nos. 063 and 084 and the defendant CINTAS
deposit account.
3.6 Due to excusable mistake, plaintiff was unable to obtain
reimbursement for the remittance it made from MMP Account Nos.
063, 084 and from the deposit account of defendant CINTAS.
3.7 As a consequence of said mistake, plaintiff delivered to the
foregoing defendants and/or to third parties upon orders of the
defendants substantially all the funds in MMP Account Nos. 063, 084
and the deposit account of defendant CINTAS.
3.8 The amount of US$340,000.00 delivered by plaintiff to the
foregoing defendants constituted an overpayment and/or erroneous
payment as defendants had no right to demand the same; further, said
amount having been unduly delivered by mistake, the foregoing
defendants were obliged to return it.

3.9 Since the foregoing defendants had no legal right to the

overpayment or erroneous payment of US$340,000.00 they, therefore,
hold said money in trust for the plaintiff.
3.10 Despite numerous demands to the defendants WILFRIDO C.
MARTINEZ, RUBEN MARTINEZ, LACSON and CINTAS for restitution
of the funds erroneously paid or overpaid to said defendants, they
31
have failed and continue to fail to make any restitution.
The respondent prayed therein that, after due proceedings, judgment be
rendered in its favor, viz:
ON THE FIRST ALTERNATIVE CAUSE OF ACTION

5.4 Ordering defendants to be, jointly and severally, liable to plaintiff

for actual damages in an amount to be proved at the trial.
5.5 A writ of preliminary attachment be issued against the properties of
the defendants WILFRIDO C. MARTINEZ, RUBEN MARTINEZ,
LACSON and CINTAS as a security for the satisfaction of any
judgment that may be recovered.
Plaintiff further prays for such other relief as may be deemed just and
32
equitable in the premises.
In his answer to the complaint, petitioner Ruben Martinez interposed the
following special and affirmative defenses:

4.1 Ordering defendants GONZALES, WILFRIDO C. MARTINEZ and

CINTAS, jointly and severally, liable to pay plaintiff the amount of
US$340,000.00 with interests thereon from February 20, 1982 until
fully paid.

BY WAY OF SPECIAL AND AFFIRMATIVE DEFENSES, answering

defendant respectfully states:

4.2 Declaring that defendant CINTAS is a mere alter ego or business

conduit of defendants LACSON and WILFRIDO C. MARTINEZ; hence,
the foregoing defendants are, jointly and severally, liable to pay plaintiff
the amount of US$340,000.00 with interests thereon.

2. Defendant is not the holder, owner, depositor, trustee and has no

interest whatsoever in the account in Philippine Banking Corporation
(FCD SA 18402-7) where the plaintiff remitted the amount sought to be
recovered. Hence, he did not benefit directly or indirectly from the said
remittance;

4.3 Ordering the foregoing defendants to be, jointly and severally,

liable for the amount of P100,000.00 as and for attorneys fees; and
4.4 Ordering the foregoing defendants to be, jointly and severally,
liable to plaintiff for actual damages in an amount to be proved at the
trial. Or ON THE SECOND ALTERNATIVE CAUSE OF ACTION
5.1 Declaring that plaintiff made an erroneous payment in the amount
of US$340,000.00 to defendants LACSON, WILFRIDO C. MARTINEZ,
RUBEN MARTINEZ and CINTAS.
5.2 Declaring the foregoing defendants to be, jointly and severally,
liable to reimburse plaintiff the amount of US$340,000.00 with interest
thereon from February 20, 1982 until fully paid.
5.3 Ordering defendants to be, jointly and severally, liable for the
amount of P100,000.00 as and for attorneys fees; and

3. Defendant did not participate in any manner whatsoever in the

remittance of funds from the plaintiff to the alleged FCD Account in the
Philippine Banking Corporation;
4. Defendant has not received nor benefited from the alleged
remittance, "payment," "overpayment" or "erroneous payment"
allegedly made by plaintiff; hence, insofar as he is concerned, there is
nothing to return to or to "hold in trust" for the plaintiff;
5. Plaintiffs alleged remittance of the amount by mere telex or
telephone instruction was highly irregular and questionable considering
that the undertaking was that no remittance or transfer could be done
without the prior signature of the authorized signatories;
6. The alleged telex instructions to the plaintiff was for it to confirm the
amounts that are "free and available" which it did;
7. Plaintiff is guilty of estoppel or laches by making it appear that the
funds so remitted are "free and available" and by not acting within
reasonable time to correct the alleged mistake;

8. The alleged remittance, "overpayment" and "erroneous payment"

was manipulated by plaintiffs own employees, officers or
representatives without connivance or collusion on the part of the
answering defendant; hence, plaintiff has only itself to blame for the
same; likewise, its recourse is not against answering defendant;
9. Plaintiffs Complaint is defective in that it has failed to state the facts
constituting the "mistake" regarding its failure to obtain reimbursement
from MMP 063 and 084;
10. Plaintiff is guilty of gross negligence and it only has itself to blame
for its alleged loss;

Central Bank prevailing rate of exchange in October 1980, with

interest thereon as above-stated;
3. Ordering all defendants to, jointly and severally, pay unto
plaintiff the amount of P50,000.00 as and for attorneys fees,
plus costs.
All counterclaims and cross-claims are dismissed for lack of merit.
SO ORDERED.

34

12. Assuming that defendant is a "joint account holder" of said MMP

063 and 084, plaintiff has failed to plead defendants obligations, if any,
by being said "joint account holder;" likewise, the Complaint fails to
attach the corresponding documents showing defendants being a
33
"joint account holder."

The trial court ruled that the CLL was a mere paper company with nominee
shareholders in Hongkong. It ruled that the principle of piercing the veil of
corporate entity was applicable in this case, and held the defendants liable,
jointly and severally, for the claim of the respondent, on its finding that the
defendants merely used the CLL as their business conduit. The trial court
declared that the majority shareholder of Mar Tierra Corporation was the RJL,
controlled by petitioner Ruben Martinez and his brothers, Jose and Luis
Martinez, as majority shareholders thereof. Moreover, petitioner Ruben
Martinez was a joint account holder of MMP Nos. 063 and 084. The trial court,
likewise, found that the auditors of Mar Tierra Corporation and the CLL
confirmed that the defendants owed US$340,000. The trial court concluded
that the respondent had established its causes of action against Wilfrido
Martinez, Lacson, Gonzales, and petitioner Ruben Martinez; hence, held all of
them liable for the claim of the respondent.

The CLL was declared in default for its failure to file an answer to the
complaint.

The decision was appealed to the CA. On June 27, 1997, the CA rendered its
decision, the dispositive portion of which reads:

After trial, the RTC rendered its decision, the dispositive portion of which reads
as follows:

WHEREFORE, the decision of the Court a quo dated December [19],

1991 is hereby MODIFIED, by exonerating appellant Blamar Gonzales
from any liability to appellee and the complaint against him is
DISMISSED. The decision appealed from is AFFIRMED in all other
respect.

11. Sometime on or about 1980, defendant was made to sign blank

forms concerning opening of money market placements and perhaps,
this is how he became a "joint account holder" of MMP 063 and 084;
defendant at that time did not realize the import or significance of his
act; afterwards, defendant did not do any act or omission by which he
could be implicated in this case;

PREMISES CONSIDERED, judgment is hereby rendered as follows:

1. Ordering all the defendants, jointly and severally, to pay
plaintiff the amount of US$340,000.00 or its equivalent in
Philippine currency measured at the Central Bank prevailing
rate of exchange in October 1980 and with legal interest
thereon computed from the filing of plaintiffs complaint on
June 17, 1983 until fully paid;
2. Declaring that defendant Cintas Largas Ltd. is a mere
business conduit and alter ego of the individual defendants,
thereby holding the individual defendants, jointly and severally,
liable to pay plaintiff the aforesaid amount of US$340,000.00
or its equivalent in Philippine Currency measured at the

SO ORDERED.

35

The appellate court exonerated Gonzales of any liability, reasoning that he was
not a stockholder of the CLL nor of Mar Tierra Corporation, but was a mere
36
employee of the latter corporation. Petitioner Ruben Martinez sought a
37
reconsideration of the decision of the CA, to no avail.
Dissatisfied with the decision and resolution of the appellate court, the
petitioner, filed the petition at bar, on the following grounds:
I

RESPONDENT COURT OF APPEALS ERRED IN FINDING THAT

HEREIN PETITIONER RUBEN MARTINEZ IS LIABLE TO
RESPONDENT
BPI
INTERNATIONAL
FINANCE
FOR
REIMBURSEMENT OF THE US$340,000.00 REMITTED BY SAID
RESPONDENT BPI INTERNATIONAL FINANCE TO FCD SA
ACCOUNT NO. 18402-7 AT THE PHILIPPINE BANKING
CORPORATION, PORT AREA BRANCH.
II
RESPONDENT COURT OF APPEALS ERRED IN NOT GRANTING
THE COUNTER-CLAIM OF PETITIONER RUBEN MARTINEZ
CONSIDERING THE EVIDENCE ON RECORD THAT PROVES THE
38
SAME.
The paramount issue posed for resolution is whether or not the petitioner is
obliged to reimburse to the respondent the principal amount of US$340,000.
The petitioner asserts that the trial and appellate courts erred when they held
him liable for the reimbursement of US$340,000 to the respondent. He
contends that he is not in actuality a stockholder of Mar Tierra Corporation, nor
a stockholder of the CLL. He was not involved in any way in the operations of
the said corporations. He added that while he may have signed the signature
cards of MMP Nos. 063 and 084 in blank, he never had any involvement in the
management and disposition of the said accounts, nor of any deposits in or
withdrawals from either or both accounts. He was not aware of any
transactions between the respondent, Wilfrido Martinez, and Gonzales, with
reference to the remittance of the US$340,000 to FCD SA 18402-7; nor did he
oblige himself to pay the said amount to the respondent. According to the
petitioner, there is no evidence that he had benefited from any of the following:
(a) the remittance by the respondent of the US$340,000 to Account No. FCD
SA 18402-7 owned by Mar Tierra Corporation; (b) the money market
placements in MMP Nos. 063 and 084, or, (c) from any deposits in or
withdrawals from the said account and money market placements.
On the other hand, the appellate court found the petitioner and his codefendants, jointly and severally, liable to the respondent for the payment of
the US$340,000 based on the following findings of the trial court:
The Court finds that defendant Cintas Largas (Ltd.) with capitalization
of $10,000.00 divided into 1,000 shares at HK$10 per share, is a mere
paper company with nominee shareholders in Hongkong, namely:
Overseas Nominees Ltd. and Shares Nominees Ltd., with defendants
Wilfrido and Miguel J. Lacson as the sole directors (Exh. A). Since the
said shareholders are mere nominee companies, it would appear that
the said defendants Wilfrido and Miguel J. Lacson who are the sole

directors are the real and beneficial shareholders (t.s.n., 9-1-87, p. 5).
Further, defendant Cintas Largas Ltd. has no real office in Hongkong
as it is merely being accommodated by Price Waterhouse, a large
accounting office in Hongkong (t.s.n., 9-1-87, pp. 7-8).
Defendant Cintas Largas Ltd., being a mere alter ego or business
conduit for the individual defendants with no corporate personality
distinct and separate from that of its beneficial shareholders and with
no substantial assets in its own name, it is safe to conclude that the
remittance of US$340,000.00 was, in fact, a remittance made for the
benefit of the individual defendants. Plaintiff was supposed to deduct
the US$340,000.00 remitted to the foreign currency deposit account
from Cintas Largas (Ltd.) funds or from money market placement
account Nos. 063 and 084 as well as Cintas Largas Ltd. deposit
account (Exh. FF-24).

Defendant Cintas Largas Ltd. was established only for financing (t.s.n.,
12-19-88, pp. 25-26) and the active owners of Cintas are defendants
Miguel Lacson and Wilfrido C. Martinez (t.s.n., 12-19-88, p. 22). Mar
Tierra Corporation of which defendant Wilfrido Martinez is the
President and one of its owners and defendant Blamar Gonzales as
the Vice President, sells molasses to defendant Cintas Largas Ltd.
Defendant Miguel J. Lacson is a business partner in purchasing
molasses for Mar Tierra Corporation. Mar Tierra Corporation was
selling molasses to Cintas Largas Ltd. which were purchased by
Miguel Lacson and Wilfrido C. Martinez (t.s.n., 12-19-88, pp. 23-24).
The majority owner of Mar Tierra Corporation is RJL Martinez Fishing
Corporation which is owned by brothers Ruben Martinez, Jose
Martinez and Luis Martinez (t.s.n., 12-19-88, pp. 24-25; t.s.n., 6-20-88,
pp. 11-12). The FCD SA-18402-7 account at Philippine Banking
Corporation, Port Area Branch, where the US$340,000.00 was
remitted by the plaintiff is the account of Mar Tierra Corporation, and
with the interlapping connection of the defendants to each other, these
could be the reason why the funds of Cintas Largas Ltd. were being
co-mingled and controlled by defendants more particularly defendants
Blamar Gonzales and Wilfrido C. Martinez (Exhs. D, E, F, G, H, I, J, L,
M, N, O, P, R, S, and T).
On the basis of the evidence, the Court finds and so holds that the
cause of action of the plaintiff against the defendants has been
39
established.
We do not agree with the trial court and appellate court.

We note that the question of whether or not a corporation is merely an alter

40
ego is purely one of fact. So is the question of whether or not a corporation is
a paper company or a sham or subterfuge or whether the respondent adduced
the requisite quantum of evidence warranting the piercing of the veil of
41
corporate entity of the CLL. The Court is not a trier of facts. Hence, the
factual findings of the trial court, as affirmed by the appellate court, are
42
generally conclusive upon this Court. However, the rule is subject to the
following exceptions: (a) where the conclusion is a finding grounded entirely on
speculation, surmise and conjectures; (b) where the information made is
manifestly mistaken; (c) where there is grave abuse of discretion; (d) where the
judgment is based on a misapplication of facts, and the findings of facts of the
trial court and the appellate court are contradicted by the evidence on record;
and (e) when certain material facts and circumstances had been overlooked by
the trial court which, if taken into account, would alter the result of the case.
We have reviewed the records and find that some substantial factual findings
of the trial court and the appellate court and, consequently, their conclusions
based on the said findings, are not supported by the evidence on record.
The general rule is that a corporation is clothed with a personality separate and
distinct from the persons composing it. Such corporation may not be held liable
for the obligation of the persons composing it; and neither can its stockholders
43
be held liable for such obligation. A corporation has a separate personality
distinct from its stockholders and from other corporation to which it may be
44
connected. This separate and distinct personality of a corporation is a fiction
45
created by law for convenience and to prevent injustice.
Nevertheless, being a mere fiction of law, peculiar situations or valid grounds
can exist to warrant, albeit sparingly, the disregard of its independent being
46
and the piercing of the corporate veil. Thus, the veil of separate corporate
personality may be lifted when such personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime; or used as a shield
to confuse the legitimate issues; or when the corporation is merely an adjunct,
a business conduit or an alter ego of another corporation or where the
corporation is so organized and controlled and its affairs are so conducted as
to make it merely an instrumentality, agency, conduit or adjunct of another
47
corporation; or when the corporation is used as a cloak or cover for fraud or
illegality, or to work injustice, or where necessary to achieve equity or for the
48
protection of the creditors. In such cases where valid grounds exist for
piercing the veil of corporate entity, the corporation will be considered as a
49
50
mere association of persons. The liability will directly attach to them.
However, mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stocks of a corporation is not by itself a sufficient
ground to disregard the separate corporate personality. The substantial identity
of the incorporators of two or more corporations does not warrantly imply that
51
there was fraud so as to justify the piercing of the writ of corporate fiction. To

disregard the said separate juridical personality of a corporation, the

52
wrongdoing must be proven clearly and convincingly.
The test in determining the application of the instrumentality or alter ego
doctrine is as follows:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will or existence of
its own;
2. Such control must have been used by the defendant to commit fraud
or wrong, to perpetuate the violation of a statutory or other positive
legal duty, or dishonest and unjust act in contravention of plaintiffs
legal rights; and
3. The aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the corporate
veil." In applying the "instrumentality" or "alter ego" doctrine, the courts are
concerned with reality and not form, with how the corporation operated and the
53
individual defendants relationship to that operation.
In this case, the respondent failed to adduce the quantum of evidence
necessary to prove any valid ground for the piercing of the veil of corporate
entity of Mar Tierra Corporation, or of RJL for that matter, and render the
petitioner liable for the respondents claim, jointly and severally, with Wilfrido
Martinez and Lacson. The mere fact that the majority stockholder of Mar Tierra
Corporation is the RJL, and that the petitioner, along with Jose and Luis
Martinez, owned about 42% of the capital stock of RJL, do not constitute
sufficient evidence that the latter corporation, and/or the petitioner and his
brothers, had complete domination of Mar Tierra Corporation. It does not
automatically follow that the said corporation was used by the petitioner for the
purpose of committing fraud or wrong, or to perpetrate an injustice on the
respondent. There is no evidence on record that the petitioner had any
involvement in the purchases of molasses by Wilfrido Martinez, Gonzales and
Lacson, and the subsequent sale thereof to the CLL, through Mar Tierra
Corporation. On the contrary, the evidence on record shows that the CLL
purchased molasses from Mar Tierra Corporation and paid for the same
through the credit facility granted by the respondent to the CLL. The CLL,
thereafter, made remittances to Mar Tierra Corporation from its deposit
account and MMP Nos. 063 and 084 with the respondent. The close business
relationship of the two corporations does not warrant a finding that Mar Tierra
Corporation was but a conduit of the CLL.

Likewise, the respondent failed to adduce preponderant evidence to prove that

the Mar Tierra Corporation and the RJL were so organized and controlled, its
affairs so conducted as to make the latter corporation merely an
instrumentality, agency, conduit or adjunct of the former or of Wilfrido Martinez,
Gonzales, and Lacson for that matter, or that such corporations were
organized to defraud their creditors, including the respondent. The mere fact,
therefore, that the businesses of two or more corporations are interrelated is
not a justification for disregarding their separate personalities, absent sufficient
showing that the corporate entity was purposely used as a shield to defraud
54
creditors and third persons of their rights.
Also, the mere fact that part of the proceeds of the sale of molasses made by
Mar Tierra Corporation to the CLL may have been used by the latter as
deposits in its deposit account with the respondent or in the money market
placements in MMP Nos. 063 and 084, or that the funds of Mar Tierra
Corporation and the CLL with the respondent were mingled, and their
disposition controlled by Wilfrido Martinez, does not constitute preponderant
evidence that the petitioner, Wilfrido Martinez and Lacson used the Mar Tierra
Corporation and the RJL to defraud the respondent. The respondent treated
the CLL and Mar Tierra Corporation as separate entities and considered them
as one and the same entity only when Wilfrido C. Martinez and/or Blamar
Gonzales failed to pay the US$340,000 remitted by the respondent to FCD SA
18402-7. This being the case, there is no factual and legal basis to hold the
petitioner liable to the respondent for the said amount.
Contrary to the ruling of the trial court and the appellate court, the auditors of
the CLL and the Mar Tierra Corporation, in their report, did not find the
petitioner liable for the respondents claim in their report. The auditors, in fact,
55
found the CLL alone liable for the said amount. Even a cursory reading of the
report will show that the name of the petitioner was not mentioned therein.
The respondent failed to adduce evidence that the petitioner had any
involvement in the transactions between the CLL, through Wilfrido Martinez
and Gonzales, and the respondent, with reference to the remittance of the
US$340,000 to FCD SA 18402-7. In fact, the said transaction was so
confidential that Gonzales even suggested to the respondent that the name of
Wilfrido Martinez or Mar Tierra Corporation be not made of record, and to
authorize only Wilfrido Martinez to sign the telex instruction:
OCT. 10, 1980
TO: AYALA FINANCE

RE: TRANSFER OF FUNDS

THIS IS TO CONFRM OUR TELEPHONE CONVERSATION THAT
WE WLD LIKE TO SUGGEST THE FF PROCEDURES FOR FUND
TRANSFER.
1. TLX INSTRUCTION THAT FUNDS BE TRANSFERRED TO
OUR FCD ACCT BY TELEGRAPHIC TRANSFER.
2. WE WILL ONLY USE ONE ACCT W/C IS FCD SA 18402-7
OF PHILBANKING CORPORATION, PORT AREA BRANCH,
UNION CEMENT BLDG, BONIFACIO DRIVE, PORT AREA,
METRO MANILA, PHILS.
3. PAYEE SHLD BE FCD SA 18402-7 AND NO MENTION OF
W.C. MARTINEZ OR MAR TIERRA CORP. TLX
INSTRUCTION SHLD BE SIGNED BY W.C. MARTINEZ AND
WILL BE SENT ONLY THRU TLX MACHINE OF MAR
TIERRA CORP.
4. FINAL CONFIRMATION
TELEPHONE CALL.

OF

THE

TRANSFER

BY

PLS CONFRM TODAY TOTAL AMT. THAT IS FREE AND

AVAILABLE SO WE CAN FORMALIZE INSTRUCTION OF
TRANSFER IF THE ABOVE PROCEDURE IS APPROVED BY YOU.
PLS CONFRM ALSO LIST OF CORRESPONDENT BANK IN HK.
IN CASE OF WELLS FARGO HK, WE WLD LIKE TO SUGGEST THE
FF PROCEDURE:
1. WELLS FARGO HK WIL SEND A TLX TO MANILA
INSTRUCTING PHIL BANKING CORP TO CREDIT FCD SA
18402-7.
2. REIMBURSEMENT INSTRUCTION, AT THE SAME TIME
WELLS FARGO HK WIL REQUEST WELLS FARGO NEW
YORK TO CREDIT FCDU NO. 003-019205 FOR THE ACCT
56
OF PHIL BANKING CORP.
Even the respondent admitted, in its complaint, that the CLL, Gonzales, and
Wilfrido Martinez, bound and obliged themselves to repay the US$340,000, viz:

ATTN: MICHAEL SUNG/BING MATOTO

FR: B. GONZALES

2.2 The remittance by plaintiff of the sum of US$340,000.00 as

previously explained in the foregoing paragraphs was made upon the

express instructions of defendants GONZALES and WILFRIDO C.

MARTINEZ acting for and in behalf of the defendant CINTAS,
defendants GONZALES and WILFRIDO C. MARTINEZ being the duly
authorized representatives of defendant CINTAS to transact any and
all of its business with plaintiff.
2.3 The remittance of US$340,000.00 was made under an agreement
for plaintiff to advance the said amount and for defendants
GONZALES, WILFRIDO C. MARTINEZ and CINTAS to repay plaintiff
all such monies so advanced to said defendants or to their order.
2.4 In making said remittance, plaintiff acted as the agent of the
foregoing defendants in meeting the latters liability to the recipient/s of
the amount so remitted.
2.5 The remittance of US$340,000.00 which remains unsettled to date
is a just, binding and lawful obligation of the defendants GONZALES,
WILFRIDO C. MARTINEZ and CINTAS.
2.6 Defendant CINTAS is a reinvoicing or paper company with
nominee shareholders in Hongkong. The real and beneficial
shareholders of the foregoing defendants are the defendants
LACSON, and WILFRIDO C. MARTINEZ.
2.7 Defendant CINTAS is being used by the foregoing defendants as
an alter ego or business conduit for their sole benefit and/or to defeat
public convenience.
2.8 Defendant CINTAS, being a mere alter ego or business conduit for
the foregoing defendants, has no corporate personality distinct and
separate from that of its beneficial shareholders and likewise has no
substantial assets in its own name.
2.9 The remittance of US$340,000.00 as referred to previously,
although made upon the instructions of defendants GONZALES,
WILFRIDO C. MARTINEZ and CINTAS, was in fact a remittance made
57
for the benefit of the beneficial shareholders of defendant CINTAS.

respondent duly established, based on Wilfrido Martinezs answer to the

complaint, and held the petitioner liable for the said amount based on the
signature cards in this language:
Defendants Ruben Martinez, Wilfrido C. Martinez and Miguel Lacson
are joint account holders of the money market placement account Nos.
063 and 084 (par. 17 page 4 Answer of defendant Wilfrido C. Martinez;
par. 2, page 5, Amended Answer of defendant Lacson; t.s.n., 4-18-88,
59
p. 7).
The appellate court affirmed the ruling of the trial court without making any
60
specific reference to the aforequoted ruling of the trial court.
We do not agree. The judicial admissions made by Wilfrido Martinez in his
61
answer to the complaint are not binding on the petitioner. The evidence on
record shows that the petitioner affixed his signatures on the signature cards
merely upon the request of his son, Wilfrido Martinez. The signature cards
were printed forms of the respondent with the names of the signatories and the
supposed account holders typewritten thereon and, except for the account
number, were similarly worded, viz:
SIGNATURE CARD
Account Name:

Mr.
Ruben
Martinez Account Number: MMP-063
and/or
Mr. Wilfrido C. Martinez
and/or Mr. Miguel J.
Lacson

I.D. Card/Passport No.: _____________________________________________

Residence Address: ________________________________________________
_________________________________________ Tel.: ___________________
Office Address: ____________________________________________________
_________________________________________ Tel.: ___________________

The admissions made by the respondent in its complaint are judicial

admissions which cannot be contradicted unless there is a showing that it was
58
made through palpable mistake or that no such admission was made.
The respondent impleaded the petitioner only in its second alternative cause of
action, on its allegation that the latter was a joint account holder of MMP Nos.
063 and 084, simply because he signed the signature cards with Wilfrido
Martinez and/or Lacson in blank. The trial court found the submission of the

Number of signature required to withdraw funds: _________________________

Confirmation/Correspondence to be mailed ___ Office
to:
___ Residence

___ Others: ________________

__________________________
Other Instructions: _______________________________________________

respondent realized its mistakes, the funds in the said accounts had already
been withdrawn solely by the CLL and/or Wilfrido Martinez. This was the
testimony of Michael Sung, the witness for the respondent.

_________________________________________________________________

Q: Do you know whether this US$340,000 was really transferred to

Foreign Currency Deposit Account No. 18402-7 of the Philippine
Banking Corporation in Manila?

_________________________________________________________________

A: Yes.

Specimen of signature:

Q: Pursuant to the procedure for fund transfer as contained in Exhs. B,

C, D and E, after having made such remittance of US$340,000.00,
what was plaintiff supposed to do, if any, in order to get reimbursement
for such transfer?

1. Sgd.

(Ruben Martinez)

3. Sgd.

(Wilfrido Martinez)

SIGNATURE

NAME

SIGNATURE

NAME

2. Sgd.

(Ruben Martinez)

4. Sgd.

(Miguel J. Lacson)

SIGNATURE

NAME

SIGNATURE

NAME

62

The respondent failed to adduce any evidence, testimonial or documentary,

63
including the relevant laws of Hongkong where the placements were made to
hold the petitioner liable for the respondents claims. Other than the signature
cards, the respondent failed to adduce a shred of evidence to prove (a) the
terms and conditions of the money market placements of the CLL in MMP Nos.
063 and 084; and, (b) the rights and obligations of the petitioner, Wilfrido
Martinez and Lacson, over the money market placements. In light of the
evidence on record, the CLL and/or Wilfrido Martinez never surrendered their
ownership over the funds in favor of the petitioner when the latter co-signed the
signature cards. The CLL and/or Wilfrido Martinez retained complete control
and dominion over the funds.
By merely affixing his signatures on the signature cards, the petitioner did not
necessarily become a joint and solidary creditor of the respondent over the
said placements. Neither did the petitioner bind himself to pay to the
respondent the US$340,000 which was borrowed by the CLL and/or Wilfrido
Martinez, and later remitted to FCD SA 18402-7.
The respondent has no one but itself to blame for its failure to deduct the
US$340,000 from the foreign currency and deposit accounts and money
market placements of the CLL. The evidence on record shows that the
respondent was supposed to deduct the said amount from the money market
placements of the CLL in MMP Nos. 063 and 084, but failed to do so. The
respondent remitted the amount from its own funds and, by its negligence,
merely posted the amount in the account of the CLL. Worse, the respondent
allowed the CLL and Wilfrido Martinez to withdraw the entirety of the deposits
in the said accounts, without first deducting the US$340,000. By the time the

A: Plaintiff was supposed to deduct the US$340,000.00 remitted to the

foreign currency deposit account from the Cintas Largas funds or from
Money Market Placement Account Nos. 063 and 084 as well as the
Cintas Largas, Ltd. deposit account.
Q: Do you know if plaintiff was able to obtain reimbursement of the
US$340,000 remitted to the Philippine Banking Corporation in Manila?
A: No, because instead of deducting the remittance of US$340,000
from the funds in the money market placement accounts and/or the
Cintas Largas Deposit Account, we posted the US$340,000 remittance
as an account receivable of Cintas Largas, Ltd. since at that time the
money market placement deposits have not yet matured.
Subsequently, we failed to charge the deposit and MMP accounts
when they matured and Cintas Largas, Ltd. and/or Wilfrido C. Martinez
had already withdrawn the bulk of the funds contained in Money
Market Placement Account No. 063 and the Cintas Largas, Ltd.
Deposit Account thus, we were unable to obtain reimbursement
64
therefrom.
It cannot even be argued that if the petitioner would not be adjudged liable for
the respondents claim, he would thereby be enriching himself at the expense
of the respondent. There is no evidence on record that the petitioner withdrew
a single centavo from or was personally benefited by the funds in MMP Nos.
063 and 084. The testimonial and documentary evidence of the respondent
clearly shows that the CLL and/or Wilfrido Martinez used and disposed of the
said funds without the knowledge, involvement, and consent of the petitioner.
Furthermore, the documentary evidence of the respondent shows the
following:

Date

MMP 063
Statement of Accounts (Deposit)
Value
Date

Funds In

Funds Out

Remarks

28/11/80

16,374.36

Interests earned

01/12/80

488.16

"

"

1,089.06

"

"

28/11/80

6,664.95

Interests earned

04/12/80

29/12/80

4,779.66

"

"

"

21/01/81

4,024.83

"

"

21/01/81

13/02/81

119,478.51

2,321.99

"

100,015.00

09/12/80

Purchase HK$632,041.33
@5.29 & transferred to its
statement A/C

"

Interests earned

18/12/80

Transfer to Cintas Largas

A/C Receivable.

"

17/02/81

55.07

Interests earned

18/03/81

1,317.27

"

"

100,000.00

"

5,713.74

________
_____
US$443,9
75.85
=======
=====

_________
____
US$443,97
5.85
=========
===

US$250,00
0.00
1,290.56

Interests earned
200,000.00

1,545.42

Cintas

200,000.00

T/T to Chase Manhattan

NY for
Credit A/C Allied Capital
F/O

Purchase HK$525,000.00
@5.25 cheque made
payable to Grand Solid
Enterprises Co., Ltd.
to

Transfer
to
Largas A/R.
Interests earned

"

Transfer
Receivable
(MMP-063)

Transfer to A/C of Cintas

Largas

A/C

Frank Chan B/O Grand

Solid.
02/03/81

4,608.27

"
09/03/81

20,470.74
321.91

"
65

20/03/81
"

Interests earned
Transfer to A/C of Grand
Solid
Interests earned
60,000.00

213.40

Transfer to
Trinisia Ltd.

A/C

of

Interests earned
45,286.26

T/T to Nitto Trading &

Josho
Ind. Co., Ltd., Japan.

MMP 084
Statement of Accounts (Deposit)

"

2,028.02

Transfer
Receivable
(MMP-084)

Value

Funds In

Funds Out

Remarks

to

A/C

"

30.00
________
_____
US$777,8
15.02
========
====

_________
____
US$777,81
5.02
=========
===

Cable Charges

Statement A/C
10/04/81

66

Value Date

Funds In

Funds Out

Interests earned

17/11/80

8,067.70

"

3,062.23

"

26/11/80

3,264.34

"

21/01/81

300,000.00

1,299.80

"
02/03/81

81,415.00
2,445.49

US$ 40.89

Interests earned

311.66

"
US$
50,000.00

132.04

"

Transfer to
Grand Solid

A/C

"

Purchase
HK$268,850.00
@5.377, cheque made
payable to Grand Solid.
Interests earned

40,000.00

"
of

Purchase
HK$214,480.00
@5.362, cheque made
payable to Grand Solid.

"

52,692.00

Purchase
HK$1,789,200.00
@5.112, Cheque made
payable to Grand Solid.

Remittance from Dai

Ichi Kangyo Bank NY.
REF. KOMEIMARU

19/05/81

178,465.1
8

Transfer from CLs A/C

Receivable

Interests earned

22/05/81

46,472.00

Purchase
HK$1,535,100.00
@5.117, Cheque made
payable to Grand Solid

Remittance from C. Itoh

& Co., NY Re. Pacific
Geory.

26/05/81

28.40

Interests earned

04/06/81

1,242.80

"

Interests earned

"

Interests earned
350,000.00

13/04/81

28/04/81

5,011.99

09/11/80

Purchase
HK$267,150.00
@5.343, Cheque made
payable to Grand Solid.

Remarks

31/10/80

350,000.00

50,000.00

"

"

Interests earned

"

21/04/81

CINTAS LARGAS
Statement of Accounts (Deposit)

456.81

50,000.00

Remittance from C. Itoh

& Co., NY
Interests earned

11/06/81
"

"

129,529.26

Transfer
to
Grand
Solids A/C Receivable

02/04/81

143,000.00

Transfer

from

CLs

2,252.36

"

Purchase
HK$275,750.00
@5.515, Cheque made
payable to Grand Solid
Interests earned

66,400.00

T/T to Security Pacific

Natl Bank LA for A/C of
Twentieth Century Fox

Intl Corp.
"

15.00

Cable Charge

"

31.65

Purchase
HK$175.00
@5.53 for payment of
Business Registration
Fee.

25/06/81

1,192.24

"

22,656.88

Purchase
HK$331,500.00
@5.525, cheque made
payable to Grand Solid.
T/T to Daiwa Bank, Los
Angeles for A/C of OAC
Equipment Corp.

"

45,800.00

T/T to Josho Ind. Co.

Ltd., Japan

"

15.00

Cable Charge

03/07/81

165.47

"

15.00

T/T to Bank of Tokyo,

Kobe Branch for A/C of
Furuno Electric Co.
Ref.:
Mar
Tierra
Takashiro
Maru,
Eatelite
Nav.
and
Radar.
Cable Charge

06/07/81

17.60

Interests earned

07/07/81

14.83

"

"

"

16,000.00

T/T to Dai Ichi Kangyo

Bank, Shimizu Branch
for A/C of Takashiro
Maru.

"

15.00

Cable Charge

15/09/81

US$
482.29

11.91

"

Interests earned

Reimbursement
of
expenses paid to Price
Waterhouse & Co.
Interests earned

237.43

Purchase HK$1,421.50
for cheque payment to
Price Waterhouse & Co.

08/01/82

70,360.00

Remittance from C. Itoh

& Co., NY

19/01/82

268.74

Interests earned

"

3,064.81

Transfer to CLs Margin

A/C

"

50,000.00

Purchase
HK$295,100.00, cheque
made payable to Grand
Solid.

"

5,952.38

Interests earned
11,870.00

"

17/09/81

US$
1,250.00

Interests earned
60,000.00

"

"

TOTAL :

________
_____
US$1,756,
387.32

_________
_____
US$1,732,1
03.25

24,284.07

________
______
US$1,756,
387.32
========
======

_________
_____
US$1,756,3
87.32
=========
=====

Transfer to
Trinisia Ltd.

A/C

of

Outstanding deposits

67

Clearly from the foregoing, the withdrawals from the deposit and foreign
currency accounts and MMP Nos. 063 and 084 of the CLL, after the
respondent remitted the US$340,000, were for the account of the CLL and/or
Wilfrido Martinez, and not of the petitioner.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision
of the Court of Appeals is REVERSED AND SET ASIDE. The complaint of the
respondent against the petitioner in Civil Case No. C-10811 is DISMISSED. No
costs.

SO ORDERED.
**

***

Puno, Austria-Martinez , Tinga, and Chico-Nazario , JJ., concur.

G.R. No. 153535

July 28, 2005

SOLIDBANK CORPORATION, Petitioners,

vs.
MINDANAO FERROALLOY CORPORATION, Spouses JONG-WON HONG
*
and SOO-OK KIM HONG, TERESITA CU, and RICARDO P. GUEVARA and
**
Spouse, respondents.
DECISION
PANGANIBAN, J.:
To justify an award for moral and exemplary damages under Articles 19 to 21
of the Civil Code (on human relations), the claimants must establish the other
partys malice or bad faith by clear and convincing evidence.
The Case
1

Before us is a Petition for Review under Rule 45 of the Rules of Court,

2
3
assailing the December 21, 2001 Decision and the May 15, 2002 Resolution
of the Court of Appeals (CA) in CA-GR CV No. 67482. The CA disposed as
follows:
"IN THE LIGHT OF ALL THE FOREGOING, the appeal is DISMISSED. The
4
Decision appealed from is AFFIRMED."
The assailed Resolution, on the other hand, denied petitioners Motion for
Reconsideration.
The Facts
The CA narrated the antecedents as follows:
"The Maria Cristina Chemical Industries (MCCI) and three (3) Korean
corporations, namely, the Ssangyong Corporation, the Pohang Iron and Steel
Company and the Dongil Industries Company, Ltd., decided to forge a joint
venture and establish a corporation, under the name of the Mindanao
Ferroalloy Corporation (Corporation for brevity) with principal offices in Iligan
City. Ricardo P. Guevara was the President and Chairman of the Board of

Directors of the Corporation. Jong-Won Hong, the General Manager of

Ssangyong Corporation, was the Vice-President of the Corporation for
Finance, Marketing and Administration. So was Teresita R. Cu. On November
26, 1990, the Board of Directors of the Corporation approved a Resolution
authorizing its President and Chairman of the Board of Directors or Teresita R.
Cu, acting together with Jong-Won Hong, to secure an omnibus line in the
aggregate amount of P30,000,000.00 from the Solidbank x x x.
xxxxxxxxx
"In the meantime, the Corporation started its operations sometime in April,
1991. Its indebtedness ballooned to P200,453,686.69 compared to its assets
of only P65,476,000.00. On May 21, 1991, the Corporation secured an
ordinary time loan from the Solidbank in the amount of P3,200,000.00. Another
ordinary time loan was granted by the Bank to the Corporation on May 28,
1991, in the amount of P1,800,000.00 or in the total amount of P5,000,000.00,
due on July 15 and 26, 1991, respectively.
"However, the Corporation and the Bank agreed to consolidate and, at the
same time, restructure the two (2) loan availments, the same payable on
September 20, 1991. The Corporation executed Promissory Note No. 96-9100865-6 in favor of the Bank evidencing its loan in the amount of
P5,160,000.00, payable on September 20, 1991. Teresita Cu and Jong-Won
Hong affixed their signatures on the note. To secure the payment of the said
loan, the Corporation, through Jong-Won Hong and Teresita Cu, executed a
Deed of Assignment in favor of the Bank covering its rights, title and interest
to the following:
The entire proceeds of drafts drawn under Irrevocable Letter of Credit No. MS-041-2002080 opened with The Mitsubishi Bank Ltd. Tokyo dated June 13,
1991 for the account of Ssangyong Japan Corporation, 7F. Matsuoka-TamuraCho Bldg., 22-10, 5-Chome, Shimbashi, Minato-Ku, Tokyo, Japan up to the
extent of US$197,679.00
"The Corporation likewise executed a Quedan, by way of additional security,
under which the Corporation bound and obliged to keep and hold, in trust for
the Bank or its Order, Ferrosilicon for US$197,679.00. Jong-Won Hong and
Teresita Cu affixed their signatures thereon for the Corporation. The
Corporation, also, through Jong-Won Hong and Teresita Cu, executed a Trust
Receipt Agreement, by way of additional security for said loan, the Corporation
undertaking to hold in trust, for the Bank, as its property, the following:

2. SEC QUEDAN NO. 91-476 dated June 26, 1991 covering the following:
Ferrosilicon for US$197,679.00
"However, shortly after the execution of the said deeds, the Corporation
stopped its operations. The Corporation failed to pay its loan availments from
the Bank inclusive of accrued interest. On February 11, 1992, the Bank sent a
letter to the Corporation demanding payment of its loan availments inclusive of
interests due. The Corporation failed to comply with the demand of the Bank.
On November 23, 1992, the Bank sent another letter to the [Corporation]
demanding payment of its account which, by November 23, 1992, had
amounted to P7,283,913.33. The Corporation again failed to comply with the
demand of the Bank.
"On January 6, 1993, the Bank filed a complaint against the Corporation with
the Regional Trial Court of Makati City, entitled and docketed as Solidbank
Corporation vs. Mindanao Ferroalloy Corporation, Sps. Jong-Won Hong and
the Sps. Teresita R. Cu, Civil Case No. 93-038 for Sum of Money with a plea
for the issuance of a writ of preliminary attachment. x x x
xxxxxxxxx
"Under its Amended Complaint, the Plaintiff alleged that it impleaded Ricardo
Guevara and his wife as Defendants because, [among others]:
Defendants JONG-WON HONG and TERESITA CU, are the Vice-Presidents
of defendant corporation, and also members of the companys Board of
Directors. They are impleaded as joint and solidary debtors of [petitioner] bank
having signed the Promissory Note, Quedan, and Trust Receipt agreements
with [petitioner], in this case.
x x x x x x x x x
"[Petitioner] likewise filed a criminal complaint x x x entitled and docketed as
Solidbank Corporation vs. Ricardo Guevara, Teresita R. Cu and Jong Won
Hong x x x for Violation of P.D. 115. On April 14, 1993, the investigating
Prosecutor issued a Resolution finding no probable cause for violation of P.D.
115 against the Respondents as the goods covered by the quedan were
nonexistent:
xxxxxxxxx

1. THE MITSUBISHI BANK LTD., Tokyo L/C No. M-S-041-2002080 for

account of Ssangyong Japan Corporation, Tokyo, Japan for US$197,679.00
Ferrosilicon to expire September 20, 1991.

"In their Answer to the complaint [in the civil case], the Spouses Jong-Won
Hong and Soo-ok Kim Hong alleged, inter alia, that [petitioner] had no cause of
action against them as:

x x x the clean loan of P5.1 M obtained was a corporate undertaking of

defendant MINFACO executed through its duly authorized representatives, Ms.
Teresita R. Cu and Mr. Jong-Won Hong, both Vice Presidents then of
MINFACO. x x x.

"[Petitioner] x x x interposed an appeal, from the Decision of the Court a quo

and posed, for x x x resolution, the issue of whether or not the individual
[respondents], are jointly and severally liable to [petitioner] for the loan
availments of the [respondent] Corporation, inclusive of accrued interests and
penalties.

xxxxxxxxx
"[On their part, respondents] Teresita Cu and Ricardo Guevara alleged that
[petitioner] had no cause of action against them because: (a) Ricardo Guevara
did not sign any of the documents in favor of [petitioner]; (b) Teresita Cu signed
the Promissory Note, Deed of Assignment, Trust Receipt and Quedan in
blank and merely as representative and, hence, for and in behalf of the
Defendant Corporation and, hence, was not personally liable to [petitioner].

"In the meantime, on motion of [petitioner], the Court set aside its Order, dated
February 2, 1995, suspending the proceedings as against the [respondent]
Corporation. [Petitioner] filed a Motion for Summary Judgment against the
[respondent] Corporation. On February 28, 2000, the Court rendered a
Summary Judgment against the [respondent] Corporation, the decretal portion
of which reads as follows:

xxxxxxxxx

WHEREFORE, premises considered, this Court hereby resolves to give due

course to the motion for summary judgment filed by herein [petitioner].
Consequently, judgment is hereby rendered in favor of [Petitioner]
SOLIDBANK CORPORATION and against [Respondent] MINDANAO
FERROALLOY CORPORATION, ordering the latter to pay the former the
amount of P7,086,686.70, representing the outstanding balance of the subject
loan as of 24 September 1994, plus stipulated interest at the rate of 16% per
annum to be computed from the aforesaid date until fully paid together with an
amount equivalent to 12% of the total amount due each year from 24
September 1994 until fully paid. Lastly, said [respondent] is hereby ordered to
pay [petitioner] the amount of P25,000.00 to [petitioner] as reasonable
5
attorneys fees as well as cost of litigation."

"In view of said development, the Court issued an Order, in Civil Case No. 93038, suspending the proceedings as against the Defendant Corporation but
ordering the proceedings to proceed as against the individual defendants x x x.

In its appeal, petitioner argued that (1) it had adduced the requisite evidence to
prove the solidary liability of the individual respondents, and (2) it was not liable
for their counterclaims for damages and attorneys fees.

"In the interim, the Corporation filed, on June 20, 1994, a Petition, with the
Regional Trial Court of Iligan City, for Voluntary Insolvency x x x.
xxxxxxxxx
"Appended to the Petition was a list of its creditors, including [petitioner], for the
amount of P8,144,916.05. The Court issued an Order, on July 12, 1994, finding
the Petition sufficient in form and substance x x x.

xxxxxxxxx
"On December 10, 1999, the Court rendered a Decision dismissing the
complaint for lack of cause of action of [petitioner] against the Spouses JongWon Hong, Teresita Cu and the Spouses Ricardo Guevara, x x x.
xxxxxxxxx
"In dismissing the complaint against the individual [respondents], the Court a
quo found and declared that [petitioner] failed to adduce a morsel of evidence
to prove the personal liability of the said [respondents] for the claims of
[petitioner] and that the latter impleaded the [respondents], in its complaint and
amended complaint, solely to put more pressure on the Defendant Corporation
to pay its obligations to [petitioner].

Ruling of the Court of Appeals

Affirming the RTC, the appellate court ruled that the individual respondents
were not solidarily liable with the Mindanao Ferroalloy Corporation, because
they had acted merely as officers of the corporation, which was the real party
in interest. Respondent Guevara was not even a signatory to the Promissory
Note, the Trust Receipt Agreement, the Deed of Assignment or the Quedan; he
was merely authorized to represent Minfaco to negotiate with and secure the
loans from the bank. On the other hand, the CA noted that Respondents Cu
and Hong had not signed the above documents as comakers, but as
signatories in their representative capacities as officers of Minfaco.
Likewise, the CA held that the individual respondents were not liable to
petitioner for damages, simply because (1) they had not received the proceeds
of the irrevocable Letter of Credit, which was the subject of the Deed of
Assignment; and (2) the goods subject of the Trust Receipt Agreement had

been found to be nonexistent. The appellate court took judicial notice of the
practice of banks and financing institutions to investigate, examine and assess
all properties offered by borrowers as collaterals, in order to determine the
feasibility and advisability of granting loans. Before agreeing to the
consolidation of Minfacos loans, it presumed that petitioner had done its
homework.

In sum, there are two main questions: (1) whether the individual respondents
are liable, either jointly or solidarily, with the Mindanao Ferroalloy Corporation;
and (2) whether the award of damages to the individual respondents is valid
and legal.

As to the award of damages to the individual respondents, the CA upheld the

trial courts findings that it was clearly unfair on petitioners part to have
impleaded the wives of Guevara and Hong, because the women were not privy
to any of the transactions between petitioner and Minfaco. Under Articles 19,
20 and 2229 of the Civil Code, such reckless and wanton act of pressuring
individual respondents to settle the corporations obligations is a ground to
award moral and exemplary damages, as well as attorneys fees.

The Petition is partly meritorious.

The Courts Ruling

First Issue:
Liability of Individual Respondents

Hence this Petition.

Issues
In its Memorandum, petitioner raises the following issues:

Petitioner argues that the individual respondents were jointly or solidarily liable
with Minfaco, either because their participation in the loan contract and the
loan documents made them comakers; or because they committed fraud and
deception, which justifies the piercing of the corporate veil.

"C. May bank practices be the proper subject of judicial notice under Sec. 1 [of]
Rule 129 of the Rules of Court.

The first contention hinges on certain factual determinations made by the trial
and the appellate courts. These tribunals found that, although he had not
signed any document in connection with the subject transaction, Respondent
Guevara was authorized to represent Minfaco in negotiating for a P30 million
loan from petitioner. As to Cu and Hong, it was determined, among others, that
their signatures on the loan documents other than the Deed of Assignment
were not prefaced with the word "by," and that there were no other signatures
to indicate who had signed for and on behalf of Minfaco, the principal borrower.
In the Promissory Note, they signed above the printed name of the corporation
-- on the space provided for "Maker/Borrower," not on that provided for "Comaker."

"D. Whether or not there is evidence to sustain the claim that respondents
were impleaded to apply pressure upon them to pay the obligations in lieu of
MINFACO that is declared insolvent.

Petitioner has not shown any exceptional circumstance that sanctions the
disregard of these findings of fact, which are thus deemed final and conclusive
8
upon this Court and may not be reviewed on appeal.

"E. Whether or not there are sufficient bases for the award of various kinds of
and substantial amounts in damages including payment for attorneys fees.

No Personal Liability for Corporate Deeds

"A. Whether or not there is ample evidence on record to support the joint and
solidary liability of individual respondents with Mindanao Ferroalloy
Corporation.
"B. In the absence of joint and solidary liability[,] will the provision of Article
1208 in relation to Article 1207 of the New Civil Code providing for joint liability
be applicable to the case at bar.

"F. Whether or not respondents committed fraud and misrepresentations and

acted in bad faith.
"G. Whether or not the inclusion of respondents spouses is proper under
7
certain circumstances and supported by prevailing jurisprudence."

Basic is the principle that a corporation is vested by law with a personality

9
10
separate and distinct from that of each person composing or representing it.
Equally fundamental is the general rule that corporate officers cannot be held
personally liable for the consequences of their acts, for as long as these are for
and on behalf of the corporation, within the scope of their authority and in good
11
faith. The separate corporate personality is a shield against the personal
liability of corporate officers, whose acts are properly attributed to the
12
corporation.

Tramat Mercantile v. Court of Appeals

13

held thus:

"Personal liability of a corporate director, trustee or officer along (although not

necessarily) with the corporation may so validly attach, as a rule, only when
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad
faith or gross negligence in directing its affairs, or (c) for conflict of interest,
resulting in damages to the corporation, its stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection
thereto;
3. He agrees to hold himself personally and solidarily liable with the
corporation; or
4. He is made, by a specific provision of law, to personally answer for his
corporate action."
Consistent with the foregoing principles, we sustain the CAs ruling that
Respondent Guevara was not personally liable for the contracts. First, it is
beyond cavil that he was duly authorized to act on behalf of the corporation;
and that in negotiating the loans with petitioner, he did so in his official
capacity. Second, no sufficient and specific evidence was presented to show
that he had acted in bad faith or gross negligence in that negotiation. Third, he
did not hold himself personally and solidarily liable with the corporation. Neither
is there any specific provision of law making him personally answerable for the
subject corporate acts.
On the other hand, Respondents Cu and Hong signed the Promissory Note
without the word "by" preceding their signatures, atop the designation
"Maker/Borrower" and the printed name of the corporation, as follows:
__(Sgd) Cu/Hong__
(Maker/Borrower)
MINDANAO FERROALLOY
While their signatures appear without qualification, the inference that they
signed in their individual capacities is negated by the following facts: 1) the
name and the address of the corporation appeared on the space provided for
"Maker/Borrower"; 2) Respondents Cu and Hong had only one set of
signatures on the instrument, when there should have been two, if indeed they
had intended to be bound solidarily -- the first as representatives of the

corporation, and the second as themselves in their individual capacities; 3)

they did not sign under the spaces provided for "Co-maker," and neither were
their addresses reflected there; and 4) at the back of the Promissory Note, they
signed above the words "Authorized Representative."
Solidary Liability Not Lightly Inferred
14

Moreover, it is axiomatic that solidary liability cannot be lightly inferred. Under

Article 1207 of the Civil Code, "there is a solidary liability only when the
obligation expressly so states, or when the law or the nature of the obligation
requires solidarity." Since solidary liability is not clearly expressed in the
Promissory Note and is not required by law or the nature of the obligation in
this case, no conclusion of solidary liability can be made.
Furthermore, nothing supports the alleged joint liability of the individual
petitioners because, as correctly pointed out by the two lower courts, the
evidence shows that there is only one debtor: the corporation. In a joint
obligation, there must be at least two debtors, each of whom is liable only for a
proportionate part of the debt; and the creditor is entitled only to a
15
proportionate part of the credit.
Moreover, it is rather late in the day to raise the alleged joint liability, as this
matter has not been pleaded before the trial and the appellate courts. Before
the lower courts, petitioner anchored its claim solely on the alleged joint and
several (or solidary) liability of the individual respondents. Petitioner must be
reminded that an issue cannot be raised for the first time on appeal, but
16
seasonably in the proceedings before the trial court.
So too, the Promissory Note in question is a negotiable instrument. Under
Section 19 of the Negotiable Instruments Law, agents or representatives may
sign for the principal. Their authority may be established, as in other cases of
agency. Section 20 of the law provides that a person signing "for and on behalf
of a [disclosed] principal or in a representative capacity x x x is not liable on the
instrument if he was duly authorized."
The authority of Respondents Cu and Hong to sign for and on behalf of the
corporation has been amply established by the Resolution of Minfacos Board
of Directors, stating that "Atty. Ricardo P. Guevara (President and Chairman),
or Ms. Teresita R. Cu (Vice President), acting together with Mr. Jong Won
Hong (Vice President), be as they are hereby authorized for and in behalf of
the Corporation to: 1. Negotiate with and obtain from (petitioner) the extension
of an omnibus line in the aggregate of P30 million x x x; and 2. Execute and
17
deliver all documentation necessary to implement all of the foregoing."
Further, the agreement involved here is a "contract of adhesion," which was
prepared entirely by one party and offered to the other on a "take it or leave it"

basis. Following the general rule, the contract must be read against petitioner,
18
because it was the party that prepared it, more so because a bank is held to
19
high standards of care in the conduct of its business.
In the totality of the circumstances, we hold that Respondents Cu and Hong
clearly signed the Note merely as representatives of Minfaco.

Fraud must be established by clear and convincing evidence; mere

28
preponderance of evidence is not adequate. Bad faith, on the other hand,
imports a dishonest purpose or some moral obliquity and conscious doing of a
29
wrong, not simply bad judgment or negligence. It is synonymous with fraud,
30
in that it involves a design to mislead or deceive another.
Unfortunately, petitioner was unable to establish clearly and precisely how the
alleged fraud was committed. It failed to establish that it was deceived into
granting the loans because of respondents misrepresentations and/or
insidious actions. Quite the contrary, circumstances indicate the weakness of
its submission.

No Reason to Pierce the Corporate Veil

Under certain circumstances, courts may treat a corporation as a mere
aggroupment of persons, to whom liability will directly attach. The distinct and
separate corporate personality may be disregarded, inter alia, when the
corporate identity is used to defeat public convenience, justify a wrong, protect
a fraud, or defend a crime. Likewise, the corporate veil may be pierced when
the corporation acts as a mere alter ego or business conduit of a person, or
when it is so organized and controlled and its affairs so conducted as to make
it merely an instrumentality, agency, conduit or adjunct of another
20
corporation.
But to disregard the separate juridical personality of a
corporation, the wrongdoing must be clearly and convincingly established; it
21
cannot be presumed.
Petitioner contends that the corporation was used to protect the fraud foisted
upon it by the individual respondents. It argues that the CA failed to consider
the following badges of fraud and evident bad faith: 1) the individual
respondents misrepresented the corporation as solvent and financially capable
of paying its loan; 2) they knew that prices of ferrosilicon were declining in the
world market when they secured the loan in June 1991; 3) not a single centavo
was paid for the loan; and 4) the corporation suspended its operations shortly
22
after the loan was granted.
Fraud refers to all kinds of deception -- whether through insidious machination,
manipulation, concealment or misrepresentation -- that would lead an ordinarily
23
prudent person into error after taking the circumstances into account. In
24
contracts, a fraud known as dolo causante or causal fraud is basically a
deception used by one party prior to or simultaneous with the contract, in order
25
to secure the consent of the other. Needless to say, the deceit employed
must be serious. In contradistinction, only some particular or accident of the
26
obligation is referred to by incidental fraud or dolo incidente, or that which is
not serious in character and without which the other party would have entered
27
into the contract anyway.

First, petitioner does not deny that the P5 million loan represented the
31
consolidation of two loans, granted long before the bank required the
individual respondents to execute the Promissory Note, Trust Receipt
Agreement, Quedan or Deed of Assignment. Hence, no words, acts or
machinations arising from any of those instruments could have been used by
them prior to or simultaneous with the execution of the contract, or even as
some accident or particular of the obligation.
Second, petitioner bank was in a position to verify for itself the solvency and
trustworthiness of respondent corporation. In fact, ordinary business prudence
required it to do so before granting the multimillion loans. It is of common
knowledge that, as a matter of practice, banks conduct exhaustive
investigations of the financial standing of an applicant debtor, as well as
appraisals of collaterals offered as securities for loans to ensure their prompt
and satisfactory payment. To uphold petitioners cry of fraud when it failed to
verify the existence of the goods covered by the Trust Receipt Agreement and
the Quedan is to condone its negligence.
Judicial Notice of Bank Practices
This point brings us to the alleged error of the appellate court in taking judicial
notice of the practice of banks in conducting background checks on borrowers
and sureties. While a court is not mandated to take judicial notice of this
practice under Section 1 of Rule 129 of the Rules of Court, it nevertheless may
do so under Section 2 of the same Rule. The latter Rule provides that a court,
in its discretion, may take judicial notice of "matters which are of public
knowledge, or ought to be known to judges because of their judicial functions."
Thus, the Court has taken judicial notice of the practices of banks and other
financial institutions. Precisely, it has noted that it is their uniform practice,
before approving a loan, to investigate, examine and assess would-be
32
borrowers credit standing or real estate offered as security for the loan
applied for.

Second Issue:
Award of Damages
The individual respondents were awarded moral and exemplary damages as
well as attorneys fees under Articles 19 to 21 of the Civil Code, on the basic
premise that the suit was clearly malicious and intended merely to harass.
Article 19 of the Civil Code expresses the fundamental principle of law on
human conduct that a person "must, in the exercise of his rights and in the
performance of his duties, act with justice, give every one his due, and observe
honesty and good faith." Under this basic postulate, the exercise of a right,
though legal by itself, must nonetheless be done in accordance with the proper
norm. When the right is exercised arbitrarily, unjustly or excessively and results
in damage to another, a legal wrong is committed for which the wrongdoer
33
must be held responsible.
To be liable under the abuse-of-rights principle, three elements must concur: a)
a legal right or duty, b) its exercise in bad faith, and c) the sole intent of
34
35
prejudicing or injuring another. Needless to say, absence of good faith must
be sufficiently established.
Article 20 makes "[e]very person who, contrary to law, willfully or negligently
causes damage to another" liable for damages. Upon the other hand, held
liable for damages under Article 21 is one who "willfully causes loss or injury to
another in a manner that is contrary to morals, good customs or public policy."

For the same reason, attorneys fees cannot be granted. Article 2208 of the
Civil Code states that in the absence of a stipulation, attorneys fees cannot be
recovered, except in any of the following circumstances:
"(1) When exemplary damages are awarded;
"(2) When the defendants act or omission has compelled the plaintiff to litigate
with third persons or to incur expenses to protect his interest;
"(3) In criminal cases of malicious prosecution against the plaintiff;
"(4) In case of a clearly unfounded civil action or proceeding against the
plaintiff;
"(5) Where the defendant acted in gross and evident bad faith in refusing to
satisfy the plaintiffs plainly valid, just and demandable claim;
"(6) In actions for legal support;
"(7) In actions for the recovery of wages of household helpers, laborers and
skilled workers;
"(8) In actions for indemnity under workmens compensation and employers
liability laws;
"(9) In a separate civil action to recover civil liability arising from a crime;

For damages to be properly awarded under the above provisions, it is

36
necessary to demonstrate by clear and convincing evidence that the action
instituted by petitioner was clearly so unfounded and untenable as to amount
37
to gross and evident bad faith. To justify an award of damages for malicious
prosecution, one must prove two elements: malice or sinister design to vex or
38
humiliate and want of probable cause.
Petitioner was proven wrong in impleading Spouses Guevara and Hong.
Beyond that fact, however, respondents have not established that the suit was
so patently malicious as to warrant the award of damages under the Civil
39
Codes Articles 19 to 21, which are grounded on malice or bad faith. With the
presumption of law on the side of good faith, and in the absence of adequate
proof of malice, we find that petitioner impleaded the spouses because it
honestly believed that the conjugal partnerships had benefited from the
proceeds of the loan, as stated in their Complaint and subsequent pleadings.
Its act does not amount to evident bad faith or malice; hence, an award for
damages is not proper. The adverse result of an act per se neither makes the
act wrongful nor subjects the actor to the payment of damages, because the
40
law could not have meant to impose a penalty on the right to litigate.

"(10) When at least double judicial costs are awarded;

"(11) In any other case where the court deems it just and equitable that
attorneys fees and expenses of litigation should be recovered."
In the instant case, none of the enumerated grounds for recovery of attorneys
fees are present.
WHEREFORE, this Petition is PARTIALLY GRANTED. The assailed Decision
is AFFIRMED, but the award of moral and exemplary damages as well as
attorneys fees is DELETED. No costs.
SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ., concur.

G.R. No. 150283

April 16, 2008

RYUICHI YAMAMOTO, petitioner,

vs.
NISHINO LEATHER INDUSTRIES, INC. and IKUO NISHINO, respondents.
DECISION
CARPIO MORALES, J.:
In 1983, petitioner, Ryuichi Yamamoto (Yamamoto), a Japanese national,
organized under Philippine laws Wako Enterprises Manila, Incorporated
(WAKO), a corporation engaged principally in leather tanning, now known as
Nishino Leather Industries, Inc. (NLII), one of herein respondents.
In 1987, Yamamoto and the other respondent, Ikuo Nishino (Nishino), also a
Japanese national, forged a Memorandum of Agreement under which they
agreed to enter into a joint venture wherein Nishino would acquire such
number of shares of stock equivalent to 70% of the authorized capital stock of
WAKO.
1

Eventually, Nishino and his brother Yoshinobu Nishino (Yoshinobu) acquired

more than 70% of the authorized capital stock of WAKO, reducing Yamamotos
2
3
investment therein to, by his claim, 10%, less than 10% according to Nishino.
The corporate name of WAKO was later changed to, as reflected earlier, its
current name NLII.
Negotiations subsequently ensued in light of a planned takeover of NLII by
Nishino who would buy-out the shares of stock of Yamamoto. In the course of
the negotiations, Yoshinobu and Nishinos counsel Atty. Emmanuel G. Doce
(Atty. Doce) advised Yamamoto by letter dated October 30, 1991, the pertinent
portions of which follow:

Hereunder is a simple memorandum of the subject matters discussed

th
with me by Mr. Yoshinobu Nishino yesterday, October 29 , based on
the letter of Mr. Ikuo Nishino from Japan, and which I am now
4
transmitting to you.
xxxx

10

. Nishino of his entire equity," which proposal was yet to be authorized by the
stockholders and Board of Directors of NLII.
By way of Counterclaim, respondents, alleging that they suffered damage due
to the seizure via the implementation of the writ of replevin over the
machineries and equipment, prayed for the award to them of moral and
exemplary damages, attorneys fees and litigation expenses, and costs of suit.

12. Machinery and Equipment:

The following machinery/equipment have been contributed by you to
the company:
Splitting machine

1 unit

Samming machine

1 unit

Forklift

1 unit

Drums

4 units

The trial court, by Decision of June 9, 1995, decided the case in favor of
11
Yamamoto, disposing thus:
WHEREFORE, judgment is hereby rendered: (1) declaring plaintiff as
the rightful owner and possessor of the machineries in question, and
making the writ of seizure permanent; (2) ordering defendants to pay
plaintiff attorneys fees and expenses of litigation in the amount of Fifty
Thousand Pesos (P50,000.00), Philippine Currency; (3) dismissing
defendants counterclaims for lack of merit; and (4) ordering
defendants to pay the costs of suit.
SO ORDERED.

Toggling machine

12

(Underscoring supplied)

2 units
13

Regarding the above machines, you may take them out with you (for
your own use and sale) if you want, provided, the value of such
machines is deducted from your and Wakos capital contributions,
which will be paid to you.
Kindly let me know of your comments on all the above, soonest.
5

On appeal, the Court of Appeals held in favor of herein respondents and

14
accordingly reversed the RTC decision and dismissed the complaint. In so
holding, the appellate court found that the machineries and equipment claimed
by Yamamoto are corporate property of NLII and may not thus be retrieved
15
without the authority of the NLII Board of Directors; and that petitioners
argument that Nishino and Yamamoto cannot hide behind the shield of
16
corporate fiction does not lie, nor does petitioners invocation of the doctrine
17
of promissory estoppel. At the same time, the Court of Appeals found no
18
ground to support respondents Counterclaim.

x x x x (Emphasis and underscoring supplied)

19

On the basis of such letter, Yamamoto attempted to recover the machineries

and equipment which were, by Yamamotos admission, part of his investment
6
in the corporation, but he was frustrated by respondents, drawing Yamamoto
to file on January 15, 1992 before the Regional Trial Court (RTC) of Makati a
7
complaint against them for replevin.
Branch 45 of the Makati RTC issued a writ of replevin after Yamamoto filed a
8
bond.

20

The Court of Appeals having denied his Motion for Reconsideration,

21
Yamamoto filed the present petition, faulting the Court of Appeals
A.

x x x IN HOLDING THAT THE VEIL OF CORPORATE FICTION

SHOULD NOT BE PIERCED IN THE CASE AT BAR.
B.

In their Answer with Counterclaim, respondents claimed that the machineries

and equipment subject of replevin form part of Yamamotos capital
contributions in consideration of his equity in NLII and should thus be treated
as corporate property; and that the above-said letter of Atty. Doce to
Yamamoto was merely a proposal, "conditioned on [Yamamotos] sell-out to . .

x x x IN HOLDING THAT THE DOCTRINE OF PROMISSORY

ESTOPPEL DOES NOT APPLY TO THE CASE AT BAR.
C.

x x x IN HOLDING THAT RESPONDENTS ARE NOT LIABLE FOR

22
ATTORNEYS FEES.
The resolution of the petition hinges, in the main, on whether the advice in the
letter of Atty. Doce that Yamamoto may retrieve the machineries and
equipment, which admittedly were part of his investment, bound the
corporation. The Court holds in the negative.
Indeed, without a Board Resolution authorizing respondent Nishino to act for
and in behalf of the corporation, he cannot bind the latter. Under the
Corporation Law, unless otherwise provided, corporate powers are exercised
23
by the Board of Directors.
Urging this Court to pierce the veil of corporate fiction, Yamamoto argues, viz:
During the negotiations, the issue as to the ownership of the
Machiner[ies] never came up. Neither did the issue on the proper
procedure to be taken to execute the complete take-over of the
Company come up since Ikuo, Yoshinobu, and Yamamoto were the
owners thereof, the presence of other stockholders being only for the
purpose of complying with the minimum requirements of the law.
What course of action the Company decides to do or not to do
depends not on the "other members of the Board of Directors". It
depends on what Ikuo and Yoshinobu decide. The Company is
24
but a mere instrumentality of Ikuo [and] Yoshinobu.

the mere ownership by a single stockholder of even all or nearly all of the
capital stocks of a corporation is not by itself a sufficient ground to disregard
28
the separate corporate personality.
The elements determinative of the applicability of the doctrine of piercing the
veil of corporate fiction follow:
"1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will or existence of
its own;
2. Such control must have been used by the defendant to commit fraud
or wrong, to perpetuate the violation of a statutory or other positive
legal duty, or dishonest and unjust act in contravention of the plaintiffs
legal rights; and
3. The aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the
corporate veil." In applying the instrumentality or alter ego doctrine,
the courts are concerned with reality and not form, with how the
corporation operated and the individual defendants relationship to that
29
operation."
(Italics in the original; emphasis and underscoring
supplied)

xxxx
x x x The Company hardly holds board meetings. It has an inactive
board, the directors are directors in name only and are there to do the
bidding of the Nish[i]nos, nothing more. Its minutes are paper minutes.
25
xxx
xxxx
The fact that the parties started at a 70-30 ratio and Yamamotos
percentage declined to 10% does not mean the 20% went to others. x
x x The 20% went to no one else but Ikuo himself. x x x Yoshinobu is
the younger brother of Ikuo and has no say at all in the business.
Only Ikuo makes the decisions. There were, therefore, no other
26
members of the Board who have not given their approval.
(Emphasis and underscoring supplied)
While the veil of separate corporate personality may be pierced when the
27
corporation is merely an adjunct, a business conduit, or alter ego of a person,

In relation to the second element, to disregard the separate juridical personality

of a corporation, the wrongdoing or unjust act in contravention of a plaintiffs
legal rights must be clearly and convincingly established; it cannot be
30
presumed. Without a demonstration that any of the evils sought to be
31
prevented by the doctrine is present, it does not apply.
In the case at bar, there is no showing that Nishino used the separate
personality of NLII to unjustly act or do wrong to Yamamoto in contravention of
his legal rights.
Yamamoto argues, in another vein, that promissory estoppel lies against
respondents, thus:
Under the doctrine of promissory estoppel, x x x estoppel may arise
from the making of a promise, even though without consideration, if it
was intended that the promise should be relied upon and in fact it was
relied upon, and if a refusal to enforce it would be virtually to sanction
the perpetration of fraud or would result in other injustice.

x x x Ikuo and Yoshinobu wanted Yamamoto out of the Company. For

this purpose negotiations were had between the parties. Having
expressly given Yamamoto, through the Letter and through a
subsequent meeting at the Manila Peninsula where Ikuo himself
confirmed that Yamamoto may take out the Machinery from the
Company anytime, respondents should not be allowed to turn around
and do the exact opposite of what they have represented they will do.
In paragraph twelve (12) of the Letter, Yamamoto was expressly
advised that he could take out the Machinery if he wanted to so,
provided that the value of said machines would be deducted from his
capital contribution x x x.

It is settled that the property of a corporation is not the property of its

38
stockholders or members. Under the trust fund doctrine, the capital stock,
property, and other assets of a corporation are regarded as equity in trust for
the payment of corporate creditors which are preferred over the stockholders in
39
the distribution of corporate assets. The distribution of corporate assets and
property cannot be made to depend on the whims and caprices of the
stockholders, officers, or directors of the corporation unless the indispensable
conditions and procedures for the protection of corporate creditors are
40
followed.
WHEREFORE, the petition is DENIED.
Costs against petitioner.

xxxx
SO ORDERED.
Respondents cannot now argue that they did not intend for Yamamoto
to rely upon the Letter. That was the purpose of the Letter to begin
with. Petitioner[s] in fact, relied upon said Letter and such reliance was
further strengthened during their meeting at the Manila Peninsula.
To sanction respondents attempt to evade their obligation would be to
32
sanction the perpetration of fraud and injustice against petitioner.
(Underscoring supplied)
It bears noting, however, that the aforementioned paragraph 12 of the letter is
followed by a request for Yamamoto to give his "comments on all the above,
33
soonest."
What was thus proffered to Yamamoto was not a promise, but a mere offer,
subject to his acceptance. Without acceptance, a mere offer produces no
34
obligation.
Thus, under Article 1181 of the Civil Code, "[i]n conditional obligations, the
acquisition of rights, as well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the event which constitutes the
condition." In the case at bar, there is no showing of compliance with the
condition for allowing Yamamoto to take the machineries and equipment,
namely, his agreement to the deduction of their value from his capital
contribution due him in the buy-out of his interests in NLII. Yamamotos
35
allegation that he agreed to the condition remained just that, no proof thereof
having been presented.
The machineries and equipment, which comprised Yamamotos investment in
36
37
NLII, thus remained part of the capital property of the corporation.

CONCHITA CARPIO MORALES

Associate Justice

G.R. No. 158086

February 14, 2008

ASJ CORPORATION and ANTONIO SAN JUAN, petitioners,

vs.
SPS. EFREN & MAURA EVANGELISTA, respondents.
DECISION
QUISUMBING, J.:
1

For review on certiorari is the Decision dated April 30, 2003 of the Court of
2
Appeals in CA-G.R. CV No. 56082, which had affirmed the Decision dated
July 8, 1996 of the Regional Trial Court (RTC) of Malolos, Bulacan, Branch 9 in
Civil Case No. 745-M-93. The Court of Appeals, after applying the doctrine of
piercing the veil of corporate fiction, held petitioners ASJ Corporation (ASJ
Corp.) and Antonio San Juan solidarily liable to respondents Efren and Maura
Evangelista for the unjustified retention of the chicks and egg by-products
3
covered by Setting Report Nos. 108 to 113.
The pertinent facts, as found by the RTC and the Court of Appeals, are as
follows:
Respondents, under the name and style of R.M. Sy Chicks, are engaged in the
large-scale business of buying broiler eggs, hatching them, and selling their
4
hatchlings (chicks) and egg by-products in Bulacan and Nueva Ecija. For the
incubation and hatching of these eggs, respondents availed of the hatchery
services of ASJ Corp., a corporation duly registered in the name of San Juan
and his family.
Sometime in 1991, respondents delivered to petitioners various quantities of
eggs at an agreed service fee of 80 centavos per egg, whether successfully
hatched or not. Each delivery was reflected in a "Setting Report" indicating the
following: the number of eggs delivered; the date of setting or the date the
eggs were delivered and laid out in the incubators; the date of candling or the
date the eggs, through a lighting system, were inspected and determined if

viable or capable of being hatched into chicks; and the date of hatching, which
is also the date respondents would pick-up the chicks and by-products. Initially,
the service fees were paid upon release of the eggs and by-products to
respondents. But as their business went along, respondents delays on their
payments were tolerated by San Juan, who just carried over the balance, as
there may be, into the next delivery, out of keeping goodwill with respondents.

On February 11, 1993, respondents directed their errand boy, Allan Blanco, to
pick up the chicks and by-products covered by Setting Report No. 110 and also
to ascertain if San Juan was still willing to settle amicably their differences.
Unfortunately, San Juan was firm in his refusal and reiterated his threats on
respondents. Fearing San Juans threats, respondents never went back to the
hatchery.

From January 13 to February 3, 1993, respondents had delivered to San Juan

5
6
a total of 101,3[50] eggs, detailed as follows:

The parties tried to settle amicably their differences before police authorities,
but to no avail. Thus, respondents filed with the RTC an action for damages
based on petitioners retention of the chicks and by-products covered by
Setting Report Nos. 108 to 113.

Date Set

SR Number

No.
of
delivered

1/13/1993

SR 108

32,566 eggs

February 3, 1993

1/20/1993

SR 109

21,485 eggs

February 10, 1993

1/22/1993

SR 110

7,213 eggs

February 12, 1993

1/28/1993

SR 111

14,495 eggs

February 18, 1993

1/30/1993

SR 112

15,346 eggs

February 20, 1993

2/3/1993

SR 113

10,24[5] eggs

TOTAL

101,350 eggs

eggs Date
Pick-up date

hatched/

February 24, 1993

On February 3, 1993, respondent Efren went to the hatchery to pick up the

chicks and by-products covered by Setting Report No. 108, but San Juan
refused to release the same due to respondents failure to settle accrued
service fees on several setting reports starting from Setting Report No. 90.
Nevertheless, San Juan accepted from Efren 10,245 eggs covered by Setting
8
Report No. 113 and P15,000.00 in cash as partial payment for the accrued
service fees.
On February 10, 1993, Efren returned to the hatchery to pick up the chicks and
by-products covered by Setting Report No. 109, but San Juan again refused to
release the same unless respondents fully settle their accounts. In the
afternoon of the same day, respondent Maura, with her son Anselmo, tendered
9
P15,000.00 to San Juan, and tried to claim the chicks and by-products. She
explained that she was unable to pay their balance because she was
hospitalized for an undisclosed ailment. San Juan accepted the P15,000.00,
but insisted on the full settlement of respondents accounts before releasing
the chicks and by-products. Believing firmly that the total value of the eggs
delivered was more than sufficient to cover the outstanding balance, Maura
promised to settle their accounts only upon proper accounting by San Juan.
San Juan disliked the idea and threatened to impound their vehicle and detain
them at the hatchery compound if they should come back unprepared to fully
settle their accounts with him.

On July 8, 1996, the RTC ruled in favor of respondents and made the following
findings: (1) as of Setting Report No. 107, respondents owed petitioners
10
P102,336.80; (2) petitioners withheld the release of the chicks and by11
products covered by Setting Report Nos. 108-113; and (3) the retention of the
chicks and by-products was unjustified and accompanied by threats and
12
intimidations on respondents. The RTC disregarded the corporate fiction of
13
ASJ Corp., and held it and San Juan solidarily liable to respondents for
P529,644.80 as actual damages, P100,000.00 as moral damages, P50,000.00
as attorneys fees, plus interests and costs of suit. The decretal portion of the
decision reads:
WHEREFORE, based on the evidence on record and the
laws/jurisprudence applicable thereon, judgment is hereby rendered
ordering the defendants to pay, jointly and severally, unto the plaintiffs
the amounts of P529,644.80, representing the value of the hatched
chicks and by-products which the plaintiffs on the average expected to
derive under Setting Reports Nos. 108 to 113, inclusive, with legal
interest thereon from the date of this judgment until the same shall
have been fully paid, P100,000.00 as moral damages and P50,000.00
as attorneys fees, plus the costs of suit.
SO ORDERED.

14

Both parties appealed to the Court of Appeals. Respondents prayed for an

additional award of P76,139.00 as actual damages for the cost of other
unreturned by-products and P1,727,687.52 as unrealized profits, while
petitioners prayed for the reversal of the trial courts entire decision.
On April 30, 2003, the Court of Appeals denied both appeals for lack of merit
and affirmed the trial courts decision, with the slight modification of including
an award of exemplary damages of P10,000.00 in favor of respondents. The
Court of Appeals, applying the doctrine of piercing the veil of corporate fiction,
considered ASJ Corp. and San Juan as one entity, after finding that there was
no bona fide intention to treat the corporation as separate and distinct from

San Juan and his wife Iluminada. The fallo of the Court of Appeals decision
reads:
WHEREFORE, in view of the foregoing, the Decision appealed from is
hereby AFFIRMED, with the slight modification that exemplary
damages in the amount of P10,000.00 are awarded to plaintiffs.

V.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
THAT PETITIONERS HAVE VIOLATED THE PRINCIPLES
ENUNCIATED IN ART. 19 OF THE NEW CIVIL CODE AND
CONSEQUENTLY IN AWARDING MORAL DAMAGES, EXEMPLARY
DAMAGES AND ATTORNEYS FEES.

Costs against defendants.

VI.
SO ORDERED.

15

Hence, the instant petition, assigning the following errors:

I.
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN
HOLDING, AS DID THE COURT A QUO, THAT PETITIONERS
WITHHELD/OR FAILED TO RELEASE THE CHICKS AND BYPRODUCTS COVERED BY SETTING REPORT NOS. 108 AND 109.
II.
THE HONORABLE COURT OF APPEALS ERRED IN ADMITTING
THE HEARSAY TESTIMONY OF MAURA EVANGELISTA
SUPPORTIVE
OF
ITS
FINDINGS
THAT
PETITIONERS
WITHHELD/OR FAILED TO RELEASE THE CHICKS AND BYPRODUCTS COVERED BY SETTING REPORT NOS. 108 AND 109.
III.
THE HONORABLE COURT OF APPEALS, AS DID THE COURT A
QUO, ERRED IN NOT FINDING THAT RESPONDENTS FAILED TO
RETURN TO THE PLANT TO GET THE CHICKS AND BYPRODUCTS COVERED BY SETTING REPORT NOS. 110, 111, 112
AND 113.
IV.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING, AS
DID THE COURT A QUO, THAT THE PIERCING OF THE VEIL OF
CORPORATE ENTITY IS JUSTIFIED, AND CONSEQUENTLY
HOLDING PETITIONERS JOINTLY AND SEVERALLY LIABLE TO
PAY RESPONDENTS THE SUM OF P529,644.[80].

THE HONORABLE COURT OF APPEALS ERRED

16
AWARDING PETITIONERS COUNTERCLAIM.

IN

NOT

Plainly, the issues submitted for resolution are: First, did the Court of Appeals
err when (a) it ruled that petitioners withheld or failed to release the chicks and
by-products covered by Setting Report Nos. 108 and 109; (b) it admitted the
testimony of Maura; (c) it did not find that it was respondents who failed to
return to the hatchery to pick up the chicks and by-products covered by Setting
Report Nos. 110 to 113; and (d) it pierced the veil of corporate fiction and held
ASJ Corp. and Antonio San Juan as one entity? Second, was it proper to hold
petitioners solidarily liable to respondents for the payment of P529,644.80 and
other damages?
In our view, there are two sets of issues that the petitioners have raised.
The first set is factual. Petitioners seek to establish a set of facts contrary to
the factual findings of the trial and appellate courts. However, as well
established in our jurisprudence, only errors of law are reviewable by this Court
17
in a petition for review under Rule 45. The trial court, having had the
opportunity to personally observe and analyze the demeanor of the witnesses
18
while testifying, is in a better position to pass judgment on their credibility.
More importantly, factual findings of the trial court, when amply supported by
evidence on record and affirmed by the appellate court, are binding upon this
19
Court and will not be disturbed on appeal. While there are exceptional
20
circumstances when these findings may be set aside, none of them is
present in this case.
Based on the records, as well as the parties own admissions, the following
facts were uncontroverted: (1) As of Setting Report No. 107, respondents were
indebted to petitioners for P102,336.80 as accrued service fees for Setting
21
Report Nos. 90 to 107;
(2) Petitioners, based on San Juans own
22
admission, did not release the chicks and by-products covered by Setting
Report Nos. 108 and 109 for failure of respondents to fully settle their previous
accounts; and (3) Due to San Juans threats, respondents never returned to
23
the hatchery to pick up those covered by Setting Report Nos. 110 to 113.

Furthermore, although no hard and fast rule can be accurately laid down under
which the juridical personality of a corporate entity may be disregarded, the
following probative factors of identity justify the application of the doctrine of
24
piercing the veil of corporate fiction in this case: (1) San Juan and his wife
own the bulk of shares of ASJ Corp.; (2) The lot where the hatchery plant is
located is owned by the San Juan spouses; (3) ASJ Corp. had no other
properties or assets, except for the hatchery plant and the lot where it is
located; (4) San Juan is in complete control of the corporation; (5) There is no
bona fide intention to treat ASJ Corp. as a different entity from San Juan; and
(6) The corporate fiction of ASJ Corp. was used by San Juan to insulate
himself from the legitimate claims of respondents, defeat public convenience,
justify wrong, defend crime, and evade a corporations subsidiary liability for
25
26
damages. These findings, being purely one of fact, should be respected.
We need not assess and evaluate the evidence all over again where the
findings of both courts on these matters coincide.
On the second set of issues, petitioners contend that the retention was justified
and did not constitute an abuse of rights since it was respondents who failed to
comply with their obligation. Respondents, for their part, aver that all the
elements on abuse of rights were present. They further state that despite their
offer to partially satisfy the accrued service fees, and the fact that the value of
the chicks and by-products was more than sufficient to cover their unpaid
obligations, petitioners still chose to withhold the delivery.
The crux of the controversy, in our considered view, is simple enough. Was
petitioners retention of the chicks and by-products on account of respondents
failure to pay the corresponding service fees unjustified? While the trial and
appellate courts had the same decisions on the matter, suffice it to say that a
modification is proper. Worth stressing, petitioners act of withholding the
chicks and by-products is entirely different from petitioners unjustifiable acts of
threatening respondents. The retention had legal basis; the threats had none.
To begin with, petitioners obligation to deliver the chicks and by-products
corresponds to three dates: the date of hatching, the delivery/pick-up date and
the date of respondents payment. On several setting reports, respondents
made delays on their payments, but petitioners tolerated such delay. When
respondents accounts accumulated because of their successive failure to pay
on several setting reports, petitioners opted to demand the full settlement of
respondents accounts as a condition precedent to the delivery. However,
respondents were unable to fully settle their accounts.
Respondents offer to partially satisfy their accounts is not enough to extinguish
27
their obligation. Under Article 1248 of the Civil Code, the creditor cannot be
compelled to accept partial payments from the debtor, unless there is an
express stipulation to that effect. More so, respondents cannot substitute or
apply as their payment the value of the chicks and by-products they expect to
derive because it is necessary that all the debts be for the same kind, generally

of a monetary character. Needless to say, there was no valid application of

payment in this case.
Furthermore, it was respondents who violated the very essence of reciprocity
in contracts, consequently giving rise to petitioners right of retention. This case
is clearly one among the species of non-performance of a reciprocal obligation.
Reciprocal obligations are those which arise from the same cause, wherein
each party is a debtor and a creditor of the other, such that the performance of
28
one is conditioned upon the simultaneous fulfillment of the other. From the
moment one of the parties fulfills his obligation, delay by the other party
29
begins.
Since respondents are guilty of delay in the performance of their obligations,
they are liable to pay petitioners actual damages of P183,416.80, computed as
follows: From respondents outstanding balance of P102,336.80, as of Setting
30
Report No. 107, we add the corresponding services fees of P81,080.00 for
Setting Report Nos. 108 to 113 which had remain unpaid.
Nonetheless, San Juans subsequent acts of threatening respondents should
31
not remain among those treated with impunity. Under Article 19 of the Civil
Code, an act constitutes an abuse of right if the following elements are present:
(a) the existence of a legal right or duty; (b) which is exercised in bad faith; and
32
(c) for the sole intent of prejudicing or injuring another. Here, while petitioners
had the right to withhold delivery, the high-handed and oppressive acts of
petitioners, as aptly found by the two courts below, had no legal leg to stand
on. We need not weigh the corresponding pieces of evidence all over again
because factual findings of the trial court, when adopted and confirmed by the
appellate court, are binding and conclusive and will not be disturbed on
33
appeal.
Since it was established that respondents suffered some pecuniary loss
anchored on petitioners abuse of rights, although the exact amount of actual
damages cannot be ascertained, temperate damages are recoverable. In
arriving at a reasonable level of temperate damages of P408,852.10, which is
equivalent to the value of the chicks and by-products, which respondents, on
the average, are expected to derive, this Court was guided by the following
factors: (a) award of temperate damages will cover only Setting Report Nos.
109 to 113 since the threats started only on February 10 and 11, 1993, which
are the pick-up dates for Setting Report Nos. 109 and 110; the rates of (b) 41%
and (c) 17%, representing the average rates of conversion of broiler eggs into
hatched chicks and egg by-products as tabulated by the trial court based on
available statistical data which was unrebutted by petitioners; (d) 68,784
34
eggs, or the total number of broiler eggs under Setting Report Nos. 109 to
113; and (e) P14.00 and (f) P1.20, or the then unit market price of the chicks
and by-products, respectively.
Thus, the temperate damages of P408,852.10 is computed as follows:

[b X (d X e) + c X (d X f)]

Temperate Damages

41% X (68,784 eggs X P14)

P394,820.16

17% X (68,784 eggs X P1.20)

P 14,031.94

[P394,820.16 + P14,031.94]

P408,852.10

At bottom, we agree that petitioners conduct flouts the norms of civil society
and justifies the award of moral and exemplary damages. As enshrined in civil
law jurisprudence: Honeste vivere, non alterum laedere et jus suum cuique
35
tribuere. To live virtuously, not to injure others and to give everyone his due.
Since exemplary damages are awarded, attorneys fees are also proper. Article
2208 of the Civil Code provides that:
In the absence of stipulation, attorneys fees and expenses of litigation,
other than judicial costs, cannot be recovered, except:
G.R. No. L-19118

June 16, 1965

(1) When exemplary damages are awarded;

xxxx
WHEREFORE, the petition is PARTLY GRANTED. The Decision dated April
30, 2003 of the Court of Appeals in CA-G.R. CV No. 56082 is hereby
MODIFIED as follows:
a. Respondents are ORDERED to pay petitioners P183,416.80 as actual
damages, with interest of 6% from the date of filing of the complaint until fully
paid, plus legal interest of 12% from the finality of this decision until fully paid.
b. The award of actual damages of P529,644.80 in favor of respondents is
hereby REDUCED to P408,852.10, with legal interest of 12% from the date of
finality of this judgment until fully paid.
c. The award of moral damages, exemplary damages and attorneys fees of
P100,000.00, P10,000.00, P50,000.00, respectively, in favor of respondents is
hereby AFFIRMED.

MARIANO A. ALBERT, plaintiff-appellant,

vs.
UNIVERSITY PUBLISHING CO., INC., defendant-appellee.
Uy and Artiaga and Antonio M. Molina for plaintiff-appellant.
Aruego, Mamaril and Associates for defendant-appellee.
RESOLUTION

BENGZON, J.P., J.:

Defendant-appellee University Publishing Co., Inc. has two prayers before us:
First, that said defendant-appellee be granted leave to present original papers
not included in the records of this case because they were never presented in
the trial of the case; and second, that the decision promulgated by this Court
on January 30, 1965 be reconsidered.
For a proper appraisal of all the facts and circumstances of this case it
becomes necessary and convenient to trace the origin of the same.

d. All other claims are hereby DENIED.

No pronouncement as to costs.
SO ORDERED.
LEONARDO A. QUISUMBING
Associate Justice

Plaintiff Albert, almost sixteen (16) years ago, sued University Publishing Co.,
Inc. for breach of contract. On April 18, 1958, in L-9300, this court awarded the
sum of P15,000.00 as damages. On October 24, 1960, in L-15275, to clarify
whether the P7,000.00 paid on account should be deducted therefrom, this
Court decided that the amount should be paid in full because said partial
payment was already taken into consideration when it fixed P15,000.00 as
damages.

From the inception until the time when the decision in L-15275 was to be
executed, corporate existence on the part of University Publishing Co., Inc.
seems to have been taken for granted, for it was not put in issue in either of the
cases abovementioned. However, when the Court of First Instance of Manila
issued on July 22, 1961 an order of execution against University Publishing
Co., Inc., plaintiff, speaking also for the Sheriff of Manila, reported to the Court
by petition of August 10, 1961 that there is no such entity as University
Publishing Co., Inc., thereupon praying that, Jose M. Aruego being the real
defendant, the writ of execution be issued against him. Attached to said
petition was a certification from the Securities and Exchange Commission
dated July 31, 1961 attesting: "The records of this Commission do not show
the registration of UNIVERSITY PUBLISHING CO., INC., either as a
corporation or partnership." The issue of its corporate existence was then
clearly and squarely presented before the court.
University Publishing Co., Inc., instead of informing the lower court that it had
in its possession copies of its certificate of registration its by-laws, and all other
pertinent papers material to the point in dispute corporate existence
chose to remain silent thereon. It merely countered the aforesaid petition by
filing through counsel (Jose M. Aruego's own law firm) a manifestation stating
that Jose M. Aruego is not a party to this case and, therefore, plaintiff's petition
should be denied. After the court a quo denied the request that a writ of
execution be issued against Jose M. Aruego, plaintiff brought this present
appeal on the issue of the corporate existence of University Publishing Co.,
Inc., as determinative of the responsibility of Jose M. Aruego, the person or
official who had always moved and acted for and in behalf of University
Publishing Co., Inc.
It may be worth noting again that Jose M. Aruego started the negotiation which
culminated in the contract between the parties, signing said contract as
president of University Publishing Co., Inc. Likewise he was the one who made
partial payments up to the amount of P7,000.00 for, and in behalf of University
Publishing Co., Inc. He also appeared not only as a witness but as lawyer,
signing some pleadings or motions in defense of University Publishing Co.,
Inc., although in other instances it is one of his associates or members of his
law firm who did so. Known is the fact that even a duly existing corporation can
only move and act through natural persons. In this case it was Jose M. Aruego
who moved and acted as or for University, Publishing Co., Inc.
It is elemental that the courts can only decide the merits of a given suit
according to the records that are in the case. It is true that in the two previous
cases decided by this Court, the first, awarding damages (L-9300), the second,
clarifying the amount of P15,000.00 awarded as such (L-15275), the corporate
existence of University Publishing Co., Inc. as a legal entity was merely taken
for granted.

However, when the said issue was squarely presented before the court, and
University Publishing Co., Inc. chose to keep the courts in the dark by
withholding pertinent documents and papers in its possession and control,
perforce this Court had to decide the points raised according to the records of
the case and whatever related matters necessarily included therein. Hence, as
a consequence of the certification of the Securities and Exchange Commission
that its records "do not show the registration of University Publishing Co., Inc.,
either as a corporation or partnership," this Court concluded that by virtue of its
non-registration, it can not be considered a corporation. We further said that it
has therefore no personality separate from Jose M. Aruego and that Aruego
was in reality the one who answered and litigated through his own law firm
counsel. Stated otherwise, we found that Aruego was in fact, if not in name, the
1
defendant. Indeed, the judge of the court of first instance wrote in his decision
thus: "Defendant Aruego (all along the judge who pens this decision
considered that the defendant here is the president of the University Publishing
2
Co., Inc. since it was he who really made the contract with Justice Albert) "
And this portion of the decision made by the court a quo was never questioned
by the defendant.
The above statement made by the court a quo in its decision compelled this
Court to carefully examine the facts surrounding the dispute starting from the
time of the negotiation of the business proposition, followed by the signing of
the contract; considered the benefits received; took into account the partial
payments made, the litigation conducted, the decisions rendered and the
appeals undertaken. After thus considering the facts and circumstances,
keeping in mind that even with regard to corporations shown as duly registered
and existing, we have in many a case pierced the veil of corporate fiction to
3
administer the ends of justice, we held Aruego personally responsible for his
acts on behalf of University Publishing Co., Inc.
Defendant would reply that in all those cases where the Court pierced the veil
of corporate fiction the officials held liable were made party defendants. As
stated, defendant-appellee could not even pretend to possess corporate fiction
in view to its non-registration per the evidence so that from the start
Aruego was the real defendant. Since the purpose of formally impleading a
party is to assure him a day in court, once the protective mantle of due process
of law has in fact been accorded a litigant, whatever the imperfection in form,
the real litigant may be held liable as a party. Jose M. Aruego definitely had his
day in court, and due process of law was enjoyed by him as a matter of fact as
4
revealed by the records of the case.
The dispositive portion of the decision the reconsideration of which is being
sought is the following: "Premises considered, the order appealed from is
hereby set aside and the case remanded ordering the lower court to hold
supplementary proceedings for the purpose of carrying the judgment into effect
against University Publishing Co., Inc. and/or Jose M. Aruego."

According to several cases a litigant is not allowed to speculate on the decision

5
the court may render in the case.
The University Publishing Co., Inc.
speculated on a favorable decision based on the issue that Jose M. Aruego,
not being a formal party defendant in this case, a writ of execution against him
was not in order. It, therefore, preferred to suppress vital documents under its
possession and control rather than to rebut the certification issued by the
Securities and Exchange Commission that according to its records University
Publishing Co., Inc. was not registered. If the lower court's order is sustained,
collection of damages becomes problematical. If a new suit is filed against
Aruego, prescription might be considered as effective defense, aside from the
prospect of another ten years of pending litigation. Such are the possible
reasons for adopting the position of speculation of our decision. Our ruling
appeared to be unfavorable to such speculation. It was only after the receipt of
the adverse decision promulgated by this Court that University Publishing Co.,
Inc., disclosed its registration papers. For purposes of this case only and
according to its particular facts and circumstances, we rule that in view of the
late disclosure of said papers by the University Publishing Co., Inc., the same
can no longer considered at this stage of the proceedings.
Specifically said original papers are:
1. Original Certificate of Registration of the University Publishing Co.,
Inc., signed by then Director of Commerce, Cornelio Balmaceda,
showing that said company was duly registered as a corporation with
the Mercantile Registry of the then Bureau of Commerce (predecessor
of the Securities and Exchange Commission) as early as August 7,
1936;
2. Original copy of the Articles of Incorporation of the University
Publishing Co., Inc consisting of five (5) pages, showing that said
corporation was incorporated as early as August 1, 1936, Manila,
Philippines, with an authorized capital stock of TEN THOUSAND
PESOS (P10,000), TWO THOUSAND PESOS (P2,000.00) of which
was fully subscribed and FIVE HUNDRED PESOS (P500.00), fully
paid up; that it had a corporate existence of fifty (50) years and the
original incorporators of the same are: Jose M. Aruego, Jose A. Adeva,
Delfin T. Bruno Enrique Rimando and Federico Mangahas;
3. The original copy of the By-Laws of the University Publishing Co.,
Inc. consisting of eleven (11) pages, showing that it exercised its
franchise as early as September 4, 1936;
4. A certificate of Reconstitution of Records issued by the Securities
and Exchange Commission recognized the corporate existence of the
University Publishing, Co., Inc. as early as August 7, 1936.

Defendant-appellee could have presented the foregoing papers before the

lower court to counter the evidence of non-registration, but defendant-appellee
did not do so. It could have reconstituted its records at that stage of the
proceedings, instead of only on April 1, 1965, after decision herein was
promulgated.
It follows, therefore, that defendant-appellee may not now be allowed to submit
the abovementioned papers to form part of the record. Sec. 7 of Rule 48, Rules
of Court (in relation to Sec. 1. Rule 42), invoked by movant, states:
SEC. 7. Original papers may be required. Whenever it is necessary or
proper in the opinion of the court that original papers of any kind
should be inspected in the court on appeal, it may make such order for
the transmission, safekeeping, and return of such original papers as
may seem proper, and the court may receive and consider such
original papers in connection with the record.
The provision obviously refers to papers the originals of which are of record in
the lower court, which the appellate court may require to be transmitted for
inspection. The original papers in question not having been presented before
the lower court as part of its record, the same cannot be transmitted on appeal
under the aforesaid section. In contrast, the certification as to University
Publishing Co., Inc.'s non-registration forms part of the record in the lower
court.
For original papers not part of the lower court's record, the applicable rule is
Sec. 1 of Rule 59 on New Trial. Under said Rule, the papers in question cannot
be admitted, because they are not "newly discovered evidence ," for with due
diligence movant could have presented them in the lower court, since they
were in its possession and control.
As far as this case is concerned, therefore, University Publishing Co., Inc. must
be deemed as unregistered, since by defendant-appellee's choice the record
shows it to be so. Defendant-appellee apparently sought to delay the execution
by remaining unregistered per the certification of the Securities and Exchange
Commission. It was only when execution was to be carried out, anyway,
against it and/or its president and almost 19 years after the approval of the
law authorizing reconstitution that it reconstituted its records to show its
registration, thereby once more attempting to delay the payment of plaintiff's
claim, long since adjudged meritorious. Deciding, therefore, as we must, this
particular case on its record as submitted by the parties, defendant-appellee's
proffered evidence of its corporate existence cannot at this stage be
considered to alter the decision reached herein. This is not to preclude in future
cases the consideration of properly submitted evidence as to defendantappellee's corporate existence.

WHEREFORE, the motion for reconsideration and for leave to file original
papers not in the record, is hereby denied. It is so ordered.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Paredes, Dizon,
Regala, Makalintal and Zaldivar, JJ., concur.
Barrera, J., took no part.

G.R. No. 128690

January 21, 1999

ABS-CBN BROADCASTING CORPORATION, petitioner,

vs.
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP,
VIVA PRODUCTION, INC., and VICENTE DEL ROSARIO, respondents.
DAVIDE, JR., CJ.:
In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp.
1
(hereafter ABS-CBN) seeks to reverse and set aside the decision of 31
2
October 1996 and the resolution of 10 March 1997 of the Court of Appeals in
3
CA-G.R. CV No. 44125. The former affirmed with modification the decision of
28 April 1993 of the Regional Trial Court (RTC) of Quezon City, Branch 80, in
Civil Case No. Q-92-12309. The latter denied the motion to reconsider the
decision of 31 October 1996.
The antecedents, as found by the RTC and adopted by the Court of Appeals,
are as follows:
In 1990, ABS-CBN and Viva executed a Film Exhibition
Agreement (Exh. "A") whereby Viva gave ABS-CBN an
exclusive right to exhibit some Viva films. Sometime in

December 1991, in accordance with paragraph 2.4 [sic] of said

agreement stating that .
1.4 ABS-CBN shall have the right of first refusal to the next
twenty-four (24) Viva films for TV telecast under such terms as
may be agreed upon by the parties hereto, provided, however,
that such right shall be exercised by ABS-CBN from the actual
offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN,
through its vice-president Charo Santos-Concio, a list of
three(3) film packages (36 title) from which ABS-CBN may
exercise its right of first refusal under the afore-said agreement
(Exhs. "1" par, 2, "2," "2-A'' and "2-B"-Viva). ABS-CBN,
however through Mrs. Concio, "can tick off only ten (10) titles"
(from the list) "we can purchase" (Exh. "3" - Viva) and
therefore did not accept said list (TSN, June 8, 1992, pp. 910). The titles ticked off by Mrs. Concio are not the subject of
the case at bar except the film ''Maging Sino Ka Man."

movies because as you very well know that non-primetime

advertising rates are very low. These are the unaired titles in
the first contract.
1. Kontra Persa [sic].
2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon

For further enlightenment, this rejection letter dated January

06, 1992 (Exh "3" - Viva) is hereby quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as I
would like to express my difficulty in recommending the
purchase of the three film packages you are offering ABSCBN.

I hope you will consider this request of mine.

The other dramatic films have been offered to us before and
have been rejected because of the ruling of MTRCB to have
them aired at 9:00 p.m. due to their very adult themes.
As for the 10 titles I have choosen [sic] from the 3 packages
please consider including all the other Viva movies produced
last year. I have quite an attractive offer to make.
Thanking you and with my warmest regards.

From among the three packages I can only tick off 10 titles we
can purchase. Please see attached. I hope you will understand
my position. Most of the action pictures in the list do not have
big action stars in the cast. They are not for primetime. In line
with this I wish to mention that I have not scheduled for
telecast several action pictures in out very first contract
because of the cheap production value of these movies as well
as the lack of big action stars. As a film producer, I am sure
you understand what I am trying to say as Viva produces only
big action pictures.
In fact, I would like to request two (2) additional runs for these
movies as I can only schedule them in our non-primetime
slots. We have to cover the amount that was paid for these

On February 27, 1992, defendant Del Rosario approached

ABS-CBN's Ms. Concio, with a list consisting of 52 original
movie titles (i.e. not yet aired on television) including the 14
titles subject of the present case, as well as 104 re-runs
(previously aired on television) from which ABS-CBN may
choose another 52 titles, as a total of 156 titles, proposing to
sell to ABS-CBN airing rights over this package of 52 originals
and 52 re-runs for P60,000,000.00 of which P30,000,000.00
will be in cash and P30,000,000.00 worth of television spots
(Exh. "4" to "4-C" Viva; "9" -Viva).
On April 2, 1992, defendant Del Rosario and ABS-CBN
general manager, Eugenio Lopez III, met at the Tamarind Grill

Restaurant in Quezon City to discuss the package proposal of

Viva. What transpired in that lunch meeting is the subject of
conflicting versions. Mr. Lopez testified that he and Mr. Del
Rosario allegedly agreed that ABS-CRN was granted
exclusive film rights to fourteen (14) films for a total
consideration of P36 million; that he allegedly put this
agreement as to the price and number of films in a "napkin''
and signed it and gave it to Mr. Del Rosario (Exh. D; TSN, pp.
24-26, 77-78, June 8, 1992). On the other hand, Del Rosario
denied having made any agreement with Lopez regarding the
14 Viva films; denied the existence of a napkin in which Lopez
wrote something; and insisted that what he and Lopez
discussed at the lunch meeting was Viva's film package offer
of 104 films (52 originals and 52 re-runs) for a total price of
P60 million. Mr. Lopez promising [sic]to make a counter
proposal which came in the form of a proposal contract Annex
"C" of the complaint (Exh. "1"- Viva; Exh. "C" - ABS-CBN).

On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific
performance with a prayer for a writ of preliminary injunction and/or temporary
restraining order against private respondents Republic Broadcasting
5
Corporation (hereafter RBS ), Viva Production (hereafter VIVA), and Vicente
Del Rosario. The complaint was docketed as Civil Case No. Q-92-12309.

On April 06, 1992, Del Rosario and Mr. Graciano Gozon of

RBS Senior vice-president for Finance discussed the terms
and conditions of Viva's offer to sell the 104 films, after the
rejection of the same package by ABS-CBN.

In the meantime, private respondents filed separate

10
counterclaim. RBS also set up a cross-claim against VIVA..

On April 07, 1992, defendant Del Rosario received through his

secretary, a handwritten note from Ms. Concio, (Exh. "5" Viva), which reads: "Here's the draft of the contract. I hope you
find everything in order," to which was attached a draft
exhibition agreement (Exh. "C''- ABS-CBN; Exh. "9" - Viva, p.
3) a counter-proposal covering 53 films, 52 of which came
from the list sent by defendant Del Rosario and one film was
added by Ms. Concio, for a consideration of P35 million.
Exhibit "C" provides that ABS-CBN is granted films right to 53
films and contains a right of first refusal to "1992 Viva Films."
The said counter proposal was however rejected by Viva's
Board of Directors [in the] evening of the same day, April 7,
1992, as Viva would not sell anything less than the package of
104 films for P60 million pesos (Exh. "9" - Viva), and such
rejection was relayed to Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN and
following several negotiations and meetings defendant Del
Rosario and Viva's President Teresita Cruz, in consideration of
P60 million, signed a letter of agreement dated April 24, 1992.
granting RBS the exclusive right to air 104 Viva-produced
and/or acquired films (Exh. "7-A" - RBS; Exh. "4" - RBS)
4
including the fourteen (14) films subject of the present case.

On 27 May 1992, RTC issued a temporary restraining order enjoining private

respondents from proceeding with the airing, broadcasting, and televising of
the fourteen VIVA films subject of the controversy, starting with the film Maging
Sino Ka Man, which was scheduled to be shown on private respondents RBS'
channel 7 at seven o'clock in the evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued an
7
order directing the issuance of a writ of preliminary injunction upon ABSCBN's posting of P35 million bond. ABS-CBN moved for the reduction of the
8
bond, while private respondents moved for reconsideration of the order and
9
offered to put up a counterbound.
answers

with

11

On 3 August 1992, the RTC issued an order dissolving the writ of preliminary
injunction upon the posting by RBS of a P30 million counterbond to answer for
whatever damages ABS-CBN might suffer by virtue of such dissolution.
However, it reduced petitioner's injunction bond to P15 million as a condition
precedent for the reinstatement of the writ of preliminary injunction should
private respondents be unable to post a counterbond.
12

At the pre-trial on 6 August 1992, the parties, upon suggestion of the court,
agreed to explore the possibility of an amicable settlement. In the meantime,
RBS prayed for and was granted reasonable time within which to put up a P30
million counterbond in the event that no settlement would be reached.
As the parties failed to enter into an amicable settlement RBS posted on 1
October 1992 a counterbond, which the RTC approved in its Order of 15
13
October 1992.
On 19 October 1992, ABS-CBN filed a motion for reconsideration
15
August and 15 October 1992 Orders, which RBS opposed.
On 29 October 1992, the RTC conducted a pre-trial.

14

of the 3

16

Pending resolution of its motion for reconsideration, ABS-CBN filed with the
17
Court of Appeals a petition challenging the RTC's Orders of 3 August and 15
October 1992 and praying for the issuance of a writ of preliminary injunction to

enjoin the RTC from enforcing said orders. The case was docketed as CA-G.R.
SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary restraining
18
order to enjoin the airing, broadcasting, and televising of any or all of the
films involved in the controversy.
19

On 18 December 1992, the Court of Appeals promulgated a decision

dismissing the petition in CA -G.R. No. 29300 for being premature. ABS-CBN
challenged the dismissal in a petition for review filed with this Court on 19
January 1993, which was docketed as G.R. No. 108363.

In the meantime the RTC received the evidence for the parties in Civil Case
20
No. Q-192-1209. Thereafter, on 28 April 1993, it rendered a decision in favor
of RBS and VIVA and against ABS-CBN disposing as follows:
WHEREFORE, under cool reflection and prescinding from the
foregoing, judgments is rendered in favor of defendants and
against the plaintiff.
(1) The complaint is hereby dismissed;
(2) Plaintiff ABS-CBN is ordered to pay
defendant RBS the following:
a) P107,727.00, the amount
of premium paid by RBS to
the surety which issued
defendant RBS's bond to lift
the injunction;
b) P191,843.00 for the
amount of print advertisement
for "Maging Sino Ka Man" in
various newspapers;
c) Attorney's fees in
amount of P1 million;

the

d) P5 million as and by way of

moral damages;
e) P5 million as and by way of
exemplary damages;

(3) For defendant VIVA, plaintiff ABS-CBN is

ordered to pay P212,000.00 by way of
reasonable attorney's fees.
(4) The cross-claim of defendant RBS against
defendant VIVA is dismissed.
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price and terms
of the offer. The alleged agreement between Lopez III and Del Rosario was
subject to the approval of the VIVA Board of Directors, and said agreement
was disapproved during the meeting of the Board on 7 April 1992. Hence,
there was no basis for ABS-CBN's demand that VIVA signed the 1992 Film
Exhibition Agreement. Furthermore, the right of first refusal under the 1990
Film Exhibition Agreement had previously been exercised per Ms. Concio's
letter to Del Rosario ticking off ten titles acceptable to them, which would have
made the 1992 agreement an entirely new contract.
21

On 21 June 1993, this Court denied ABS-CBN's petition for review in G.R.
No. 108363, as no reversible error was committed by the Court of Appeals in
its challenged decision and the case had "become moot and academic in view
of the dismissal of the main action by the court a quo in its decision" of 28 April
1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals
claiming that there was a perfected contract between ABS-CBN and VIVA
granting ABS-CBN the exclusive right to exhibit the subject films. Private
respondents VIVA and Del Rosario also appealed seeking moral and
exemplary damages and additional attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed with the RTC
that the contract between ABS-CBN and VIVA had not been perfected, absent
the approval by the VIVA Board of Directors of whatever Del Rosario, it's
agent, might have agreed with Lopez III. The appellate court did not even
believe ABS-CBN's evidence that Lopez III actually wrote down such an
agreement on a "napkin," as the same was never produced in court. It likewise
rejected ABS-CBN's insistence on its right of first refusal and ratiocinated as
follows:
As regards the matter of right of first refusal, it may be true that
a Film Exhibition Agreement was entered into between
Appellant ABS-CBN and appellant VIVA under Exhibit "A" in
1990, and that parag. 1.4 thereof provides:

1.4 ABS-CBN shall have the right of first

refusal to the next twenty-four (24) VIVA films
for TV telecast under such terms as may be
agreed upon by the parties hereto, provided,
however, that such right shall be exercised by
ABS-CBN within a period of fifteen (15) days
from the actual offer in writing (Records, p.
14).
[H]owever, it is very clear that said right of first refusal in favor
of ABS-CBN shall still be subject to such terms as may be
agreed upon by the parties thereto, and that the said right shall
be exercised by ABS-CBN within fifteen (15) days from the
actual offer in writing.
Said parag. 1.4 of the agreement Exhibit "A" on the right of first
refusal did not fix the price of the film right to the twenty-four
(24) films, nor did it specify the terms thereof. The same are
still left to be agreed upon by the parties.
In the instant case, ABS-CBN's letter of rejection Exhibit 3
(Records, p. 89) stated that it can only tick off ten (10) films,
and the draft contract Exhibit "C" accepted only fourteen (14)
films, while parag. 1.4 of Exhibit "A'' speaks of the next twentyfour (24) films.
The offer of V1VA was sometime in December 1991 (Exhibits
2, 2-A. 2-B; Records, pp. 86-88; Decision, p. 11, Records, p.
1150), when the first list of VIVA films was sent by Mr. Del
Rosario to ABS-CBN. The Vice President of ABS-CBN, Ms.
Charo Santos-Concio, sent a letter dated January 6, 1992
(Exhibit 3, Records, p. 89) where ABS-CBN exercised its right
of refusal by rejecting the offer of VIVA.. As aptly observed by
the trial court, with the said letter of Mrs. Concio of January 6,
1992, ABS-CBN had lost its right of first refusal. And even if
We reckon the fifteen (15) day period from February 27, 1992
(Exhibit 4 to 4-C) when another list was sent to ABS-CBN after
the letter of Mrs. Concio, still the fifteen (15) day period within
which ABS-CBN shall exercise its right of first refusal has
22
already expired.
Accordingly, respondent court sustained the award of actual damages
consisting in the cost of print advertisements and the premium payments for
the counterbond, there being adequate proof of the pecuniary loss which RBS
had suffered as a result of the filing of the complaint by ABS-CBN. As to the
award of moral damages, the Court of Appeals found reasonable basis
therefor, holding that RBS's reputation was debased by the filing of the

complaint in Civil Case No. Q-92-12309 and by the non-showing of the film
"Maging Sino Ka Man." Respondent court also held that exemplary damages
were correctly imposed by way of example or correction for the public good in
view of the filing of the complaint despite petitioner's knowledge that the
contract with VIVA had not been perfected, It also upheld the award of
attorney's fees, reasoning that with ABS-CBN's act of instituting Civil Case No,
Q-92-1209, RBS was "unnecessarily forced to litigate." The appellate court,
however, reduced the awards of moral damages to P2 million, exemplary
damages to P2 million, and attorney's fees to P500, 000.00.
On the other hand, respondent Court of Appeals denied VIVA and Del
Rosario's appeal because it was "RBS and not VIVA which was actually
prejudiced when the complaint was filed by ABS-CBN."
Its motion for reconsideration having been denied, ABS-CBN filed the petition
in this case, contending that the Court of Appeals gravely erred in
I
. . . RULING THAT THERE WAS NO PERFECTED
CONTRACT BETWEEN PETITIONER AND PRIVATE
RESPONDENT
VIVA
NOTWITHSTANDING
PREPONDERANCE OF EVIDENCE ADDUCED
BY
PETITIONER TO THE CONTRARY.
II
. . . IN AWARDING ACTUAL AND COMPENSATORY
DAMAGES IN FAVOR OF PRIVATE RESPONDENT RBS.
III
. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN
FAVOR OF PRIVATE RESPONDENT RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first refusal over
twenty-four titles under the 1990 Film Exhibition Agreement, as it had chosen
only ten titles from the first list. It insists that we give credence to Lopez's
testimony that he and Del Rosario met at the Tamarind Grill Restaurant,
discussed the terms and conditions of the second list (the 1992 Film Exhibition
Agreement) and upon agreement thereon, wrote the same on a paper napkin.

It also asserts that the contract has already been effective, as the elements
thereof, namely, consent, object, and consideration were established. It then
concludes that the Court of Appeals' pronouncements were not supported by
law and jurisprudence, as per our decision of 1 December 1995 in Limketkai
23
Sons Milling, Inc. v. Court of Appeals, which cited Toyota Shaw, Inc. v. Court
24
25
of Appeals,
Ang Yu Asuncion v. Court of Appeals,
and Villonco Realty
26
Company v. Bormaheco. Inc.
Anent the actual damages awarded to RBS, ABS-CBN disavows liability
therefor. RBS spent for the premium on the counterbond of its own volition in
order to negate the injunction issued by the trial court after the parties had
ventilated their respective positions during the hearings for the purpose. The
filing of the counterbond was an option available to RBS, but it can hardly be
argued that ABS-CBN compelled RBS to incur such expense. Besides, RBS
had another available option, i.e., move for the dissolution or the injunction; or
if it was determined to put up a counterbond, it could have presented a cash
bond. Furthermore under Article 2203 of the Civil Code, the party suffering loss
or injury is also required to exercise the diligence of a good father of a family to
minimize the damages resulting from the act or omission. As regards the cost
of print advertisements, RBS had not convincingly established that this was a
loss attributable to the non showing "Maging Sino Ka Man"; on the contrary, it
was brought out during trial that with or without the case or the injunction, RBS
would have spent such an amount to generate interest in the film.
ABS-CBN further contends that there was no clear basis for the awards of
moral and exemplary damages. The controversy involving ABS-CBN and RBS
did not in any way originate from business transaction between them. The
claims for such damages did not arise from any contractual dealings or from
specific acts committed by ABS-CBN against RBS that may be characterized
as wanton, fraudulent, or reckless; they arose by virtue only of the filing of the
complaint, An award of moral and exemplary damages is not warranted where
the record is bereft of any proof that a party acted maliciously or in bad faith in
27
filing an action. In any case, free resort to courts for redress of wrongs is a
matter of public policy. The law recognizes the right of every one to sue for that
which he honestly believes to be his right without fear of standing trial for
damages where by lack of sufficient evidence, legal technicalities, or a different
28
interpretation of the laws on the matter, the case would lose ground.
One
29
who makes use of his own legal right does no injury. If damage results front
30
the filing of the complaint, it is damnum absque injuria.
Besides, moral
damages are generally not awarded in favor of a juridical person, unless it
enjoys a good reputation that was debased by the offending party resulting in
31
social humiliation.
As regards the award of attorney's fees, ABS-CBN maintains that the same
had no factual, legal, or equitable justification. In sustaining the trial court's
award, the Court of Appeals acted in clear disregard of the doctrines laid down
32
in Buan v. Camaganacan
that the text of the decision should state the

reason why attorney's fees are being awarded; otherwise, the award should be
disallowed. Besides, no bad faith has been imputed on, much less proved as
having been committed by, ABS-CBN. It has been held that "where no
sufficient showing of bad faith would be reflected in a party' s persistence in a
case other than an erroneous conviction of the righteousness of his cause,
33
attorney's fees shall not be recovered as cost."
On the other hand, RBS asserts that there was no perfected contract between
ABS-CBN and VIVA absent any meeting of minds between them regarding the
object and consideration of the alleged contract. It affirms that the ABS-CBN's
claim of a right of first refusal was correctly rejected by the trial court. RBS
insist the premium it had paid for the counterbond constituted a pecuniary loss
upon which it may recover. It was obliged to put up the counterbound due to
the injunction procured by ABS-CBN. Since the trial court found that ABS-CBN
had no cause of action or valid claim against RBS and, therefore not entitled to
the writ of injunction, RBS could recover from ABS-CBN the premium paid on
the counterbond. Contrary to the claim of ABS-CBN, the cash bond would
prove to be more expensive, as the loss would be equivalent to the cost of
money RBS would forego in case the P30 million came from its funds or was
borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements for the
cancelled showing of the film "Maging Sino Ka Man" because the print
advertisements were put out to announce the showing on a particular day and
hour on Channel 7, i.e., in its entirety at one time, not a series to be shown on
a periodic basis. Hence, the print advertisement were good and relevant for the
particular date showing, and since the film could not be shown on that
particular date and hour because of the injunction, the expenses for the
advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-CBN filed
the case and secured injunctions purely for the purpose of harassing and
prejudicing RBS. Pursuant then to Article 19 and 21 of the Civil Code, ABS34
CBN must be held liable for such damages. Citing Tolentino, damages may
be awarded in cases of abuse of rights even if the act done is not illicit and
there is abuse of rights were plaintiff institutes and action purely for the
purpose of harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and exemplary
35
damages, private respondents RBS cited People v. Manero,
where it was
stated that such entity may recover moral and exemplary damages if it has a
good reputation that is debased resulting in social humiliation. it then
ratiocinates; thus:
There can be no doubt that RBS' reputation has been debased
by ABS-CBN's acts in this case. When RBS was not able to
fulfill its commitment to the viewing public to show the film

"Maging Sino Ka Man" on the scheduled dates and times (and

on two occasions that RBS advertised), it suffered serious
embarrassment and social humiliation. When the showing was
canceled, late viewers called up RBS' offices and subjected
RBS to verbal abuse ("Announce kayo nang announce, hindi
ninyo naman ilalabas," "nanloloko yata kayo") (Exh. 3-RBS,
par. 3). This alone was not something RBS brought upon itself.
it was exactly what ABS-CBN had planned to happen.
The amount of moral and exemplary damages cannot be said
to be excessive. Two reasons justify the amount of the award.
The first is that the humiliation suffered by RBS is national
extent. RBS operations as a broadcasting company is [sic]
nationwide. Its clientele, like that of ABS-CBN, consists of
those who own and watch television. It is not an exaggeration
to state, and it is a matter of judicial notice that almost every
other person in the country watches television. The humiliation
suffered by RBS is multiplied by the number of televiewers
who had anticipated the showing of the film "Maging Sino Ka
Man" on May 28 and November 3, 1992 but did not see it
owing to the cancellation. Added to this are the advertisers
who had placed commercial spots for the telecast and to
whom RBS had a commitment in consideration of the
placement to show the film in the dates and times specified.
The second is that it is a competitor that caused RBS to suffer
the humiliation. The humiliation and injury are far greater in
degree when caused by an entity whose ultimate business
objective is to lure customers (viewers in this case) away from
36
the competition.
For their part, VIVA and Vicente del Rosario contend that the findings of fact of
the trial court and the Court of Appeals do not support ABS-CBN's claim that
there was a perfected contract. Such factual findings can no longer be
disturbed in this petition for review under Rule 45, as only questions of law can
be raised, not questions of fact. On the issue of damages and attorneys fees,
they adopted the arguments of RBS.
The key issues for our consideration are (1) whether there was a perfected
contract between VIVA and ABS-CBN, and (2) whether RBS is entitled to
damages and attorney's fees. It may be noted that the award of attorney's fees
of P212,000 in favor of VIVA is not assigned as another error.
I.

The first issue should be resolved against ABS-CBN. A contract is a meeting of

minds between two persons whereby one binds himself to give something or to
37
render some service to another
for a consideration. there is no contract
unless the following requisites concur: (1) consent of the contracting parties;
(2) object certain which is the subject of the contract; and (3) cause of the
38
obligation, which is established. A contract undergoes three stages:
(a) preparation, conception, or generation, which is the period
of negotiation and bargaining, ending at the moment of
agreement of the parties;
(b) perfection or birth of the contract, which is the moment
when the parties come to agree on the terms of the contract;
and
(c) consummation or death, which is the fulfillment or
39
performance of the terms agreed upon in the contract.
Contracts that are consensual in nature are perfected upon mere meeting of
the minds, Once there is concurrence between the offer and the acceptance
upon the subject matter, consideration, and terms of payment a contract is
produced. The offer must be certain. To convert the offer into a contract, the
acceptance must be absolute and must not qualify the terms of the offer; it
must be plain, unequivocal, unconditional, and without variance of any sort
from the proposal. A qualified acceptance, or one that involves a new proposal,
constitutes a counter-offer and is a rejection of the original offer. Consequently,
when something is desired which is not exactly what is proposed in the offer,
such acceptance is not sufficient to generate consent because any
40
modification or variation from the terms of the offer annuls the offer.
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the
Tamarind Grill on 2 April 1992 to discuss the package of films, said package of
104 VIVA films was VIVA's offer to ABS-CBN to enter into a new Film
Exhibition Agreement. But ABS-CBN, sent, through Ms. Concio, a counterproposal in the form of a draft contract proposing exhibition of 53 films for a
consideration of P35 million. This counter-proposal could be nothing less than
the counter-offer of Mr. Lopez during his conference with Del Rosario at
Tamarind Grill Restaurant. Clearly, there was no acceptance of VIVA's offer,
for it was met by a counter-offer which substantially varied the terms of the
offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of
41
42
Appeals and Villonco Realty Company v. Bormaheco, Inc., is misplaced.
In these cases, it was held that an acceptance may contain a request for
certain changes in the terms of the offer and yet be a binding acceptance as
long as "it is clear that the meaning of the acceptance is positively and

unequivocally to accept the offer, whether such request is granted or not." This
43
ruling was, however, reversed in the resolution of 29 March 1996,
which
ruled that the acceptance of all offer must be unqualified and absolute, i.e., it
"must be identical in all respects with that of the offer so as to produce consent
or meeting of the minds."
On the other hand, in Villonco, cited in Limketkai, the alleged changes in the
revised counter-offer were not material but merely clarificatory of what had
previously been agreed upon. It cited the statement in Stuart v. Franklin Life
44
Insurance Co. that "a vendor's change in a phrase of the offer to purchase,
which change does not essentially change the terms of the offer, does not
45
amount to a rejection of the offer and the tender of a counter-offer."
However, when any of the elements of the contract is modified upon
acceptance, such alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer.
Hence, they underwent a period of bargaining. ABS-CBN then formalized its
counter-proposals or counter-offer in a draft contract, VIVA through its Board of
Directors, rejected such counter-offer, Even if it be conceded arguendo that
Del Rosario had accepted the counter-offer, the acceptance did not bind VIVA,
as there was no proof whatsoever that Del Rosario had the specific authority to
do so.

they have been physically written on a napkin. There was even

doubt as to whether it was a paper napkin or a cloth napkin. In
short what were written in Exhibit "C'' were not discussed, and
therefore could not have been agreed upon, by the parties.
How then could this court compel the parties to sign Exhibit
"C" when the provisions thereof were not previously agreed
upon?
SECOND, Mr. Lopez claimed that what was agreed upon as
the subject matter of the contract was 14 films. The complaint
in fact prays for delivery of 14 films. But Exhibit "C" mentions
53 films as its subject matter. Which is which If Exhibits "C"
reflected the true intent of the parties, then ABS-CBN's claim
for 14 films in its complaint is false or if what it alleged in the
complaint is true, then Exhibit "C" did not reflect what was
agreed upon by the parties. This underscores the fact that
there was no meeting of the minds as to the subject matter of
the contracts, so as to preclude perfection thereof. For settled
is the rule that there can be no contract where there is no
object which is its subject matter (Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit
testimony (Exh. "D") states:

46

Under Corporation Code, unless otherwise provided by said Code, corporate

powers, such as the power; to enter into contracts; are exercised by the Board
of Directors. However, the Board may delegate such powers to either an
executive committee or officials or contracted managers. The delegation,
47
except for the executive committee, must be for specific purposes,
Delegation to officers makes the latter agents of the corporation; accordingly,
the general rules of agency as to the bindings effects of their acts would
48
apply.
For such officers to be deemed fully clothed by the corporation to
exercise a power of the Board, the latter must specially authorize them to do
so. That Del Rosario did not have the authority to accept ABS-CBN's counteroffer was best evidenced by his submission of the draft contract to VIVA's
Board of Directors for the latter's approval. In any event, there was between
Del Rosario and Lopez III no meeting of minds. The following findings of the
trial court are instructive:
A number of considerations militate against ABS-CBN's claim
that a contract was perfected at that lunch meeting on April 02,
1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the
Tamarind Grill referred to the price and the number of films,
which he wrote on a napkin. However, Exhibit "C" contains
numerous provisions which, were not discussed at the
Tamarind Grill, if Lopez testimony was to be believed nor could

We were able to reach an agreement. VIVA

gave us the exclusive license to show these
fourteen (14) films, and we agreed to pay Viva
the amount of P16,050,000.00 as well as
grant
Viva
commercial
slots
worth
P19,950,000.00. We had already earmarked
this P16, 050,000.00.
which gives a
(P19,950,000.00
P36,000,000.00).

total consideration of P36

plus
P16,050,000.00.

million
equals

On cross-examination Mr. Lopez testified:

Q. What was written in this napkin?
A. The total price, the breakdown the known
Viva movies, the 7 blockbuster movies and the
other 7 Viva movies because the price was
broken down accordingly. The none [sic] Viva
and the seven other Viva movies and the
sharing between the cash portion and the

concerned spot portion in the total amount of

P35 million pesos.
Now, which is which? P36 million or P35 million? This
weakens ABS-CBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she
transmitted Exhibit "C" to Mr. Del Rosario with a handwritten
note, describing said Exhibit "C" as a "draft." (Exh. "5" - Viva;
tsn pp. 23-24 June 08, 1992). The said draft has a well defined
meaning.
Since Exhibit "C" is only a draft, or a tentative, provisional or
preparatory writing prepared for discussion, the terms and
conditions thereof could not have been previously agreed upon
by ABS-CBN and Viva Exhibit "C'' could not therefore legally
bind Viva, not having agreed thereto. In fact, Ms. Concio
admitted that the terms and conditions embodied in Exhibit "C"
were prepared by ABS-CBN's lawyers and there was no
discussion on said terms and conditions. . . .
As the parties had not yet discussed the proposed terms and
conditions in Exhibit "C," and there was no evidence
whatsoever that Viva agreed to the terms and conditions
thereof, said document cannot be a binding contract. The fact
that Viva refused to sign Exhibit "C" reveals only two [sic] well
that it did not agree on its terms and conditions, and this court
has no authority to compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del
Rosario agreed upon at the Tamarind Grill was only
provisional, in the sense that it was subject to approval by the
Board of Directors of Viva. He testified:
Q. Now, Mr. Witness, and after that Tamarind
meeting ... the second meeting wherein you
claimed that you have the meeting of the
minds between you and Mr. Vic del Rosario,
what happened?
A. Vic Del Rosario was supposed to call us up
and tell us specifically the result of the
discussion with the Board of Directors.

Q. And you are referring to the so-called

agreement which you wrote in [sic] a piece of
paper?
A. Yes, sir.
Q. So, he was going to forward that to the
board of Directors for approval?
A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)
Q. Did Mr. Del Rosario tell you that he will
submit it to his Board for approval?
A. Yes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond doubt that
he knew Mr. Del Rosario had no authority to bind Viva to a
contract with ABS-CBN until and unless its Board of Directors
approved it. The complaint, in fact, alleges that Mr. Del
Rosario "is the Executive Producer of defendant Viva" which
"is a corporation." (par. 2, complaint). As a mere agent of Viva,
Del Rosario could not bind Viva unless what he did is ratified
by its Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210;
Arnold vs. Willets and Paterson, 44 Phil. 634). As a mere
agent, recognized as such by plaintiff, Del Rosario could not
be held liable jointly and severally with Viva and his inclusion
as party defendant has no legal basis. (Salonga vs. Warner
Barner [sic] , COLTA , 88 Phil. 125; Salmon vs. Tan, 36 Phil.
556).
The testimony of Mr. Lopez and the allegations in the
complaint are clear admissions that what was supposed to
have been agreed upon at the Tamarind Grill between Mr.
Lopez and Del Rosario was not a binding agreement. It is as it
should be because corporate power to enter into a contract is
lodged in the Board of Directors. (Sec. 23, Corporation Code).
Without such board approval by the Viva board, whatever
agreement Lopez and Del Rosario arrived at could not ripen
into a valid contract binding upon Viva (Yao Ka Sin Trading vs.
Court of Appeals, 209 SCRA 763). The evidence adduced
shows that the Board of Directors of Viva rejected Exhibit "C"
and insisted that the film package for 140 films be maintained
49
(Exh. "7-1" - Viva ).

The contention that ABS-CBN had yet to fully exercise its right of first refusal
over twenty-four films under the 1990 Film Exhibition Agreement and that the
meeting between Lopez and Del Rosario was a continuation of said previous
contract is untenable. As observed by the trial court, ABS-CBN right of first
refusal had already been exercised when Ms. Concio wrote to VIVA ticking off
ten films, Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months
after this letter was sent, was for an entirely different package.
Ms. Concio herself admitted on cross-examination to having
used or exercised the right of first refusal. She stated that the
list was not acceptable and was indeed not accepted by ABSCBN, (TSN, June 8, 1992, pp. 8-10). Even Mr. Lopez himself
admitted that the right of the first refusal may have been
already exercised by Ms. Concio (as she had). (TSN, June 8,
1992, pp. 71-75). Del Rosario himself knew and understand
[sic] that ABS-CBN has lost its rights of the first refusal when
his list of 36 titles were rejected (Tsn, June 9, 1992, pp. 10-11)
50

II
However, we find for ABS-CBN on the issue of damages. We shall first take up
actual damages. Chapter 2, Title XVIII, Book IV of the Civil Code is the specific
law on actual or compensatory damages. Except as provided by law or by
stipulation, one is entitled to compensation for actual damages only for such
51
pecuniary loss suffered by him as he has duly proved. The indemnification
shall comprehend not only the value of the loss suffered, but also that of the
52
profits that the obligee failed to obtain. In contracts and quasi-contracts the
damages which may be awarded are dependent on whether the obligor acted
with good faith or otherwise, It case of good faith, the damages recoverable are
those which are the natural and probable consequences of the breach of the
obligation and which the parties have foreseen or could have reasonably
foreseen at the time of the constitution of the obligation. If the obligor acted
with fraud, bad faith, malice, or wanton attitude, he shall be responsible for all
damages which may be reasonably attributed to the non-performance of the
53
obligation.
In crimes and quasi-delicts, the defendant shall be liable for all
damages which are the natural and probable consequences of the act or
omission complained of, whether or not such damages has been foreseen or
54
could have reasonably been foreseen by the defendant.
Actual damages may likewise be recovered for loss or impairment of earning
capacity in cases of temporary or permanent personal injury, or for injury to the
55
plaintiff's business standing or commercial credit.
The claim of RBS for actual damages did not arise from contract, quasicontract, delict, or quasi-delict. It arose from the fact of filing of the complaint

despite ABS-CBN's alleged knowledge of lack of cause of action. Thus

paragraph 12 of RBS's Answer with Counterclaim and Cross-claim under the
heading COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully well that it has
no cause of action RBS. As a result thereof, RBS suffered
56
actual damages in the amount of P6,621,195.32.
Needless to state the award of actual damages cannot be comprehended
under the above law on actual damages. RBS could only probably take refuge
under Articles 19, 20, and 21 of the Civil Code, which read as follows:
Art. 19. Every person must, in the exercise of his rights and in
the performance of his duties, act with justice, give everyone
his due, and observe honesty and good faith.
Art. 20. Every person who, contrary to law, wilfully or
negligently causes damage to another, shall indemnify the
latter for tile same.
Art. 21. Any person who wilfully causes loss or injury to
another in a manner that is contrary to morals, good customs
or public policy shall compensate the latter for the damage.
It may further be observed that in cases where a writ of preliminary injunction is
issued, the damages which the defendant may suffer by reason of the writ are
57
recoverable from the injunctive bond.
In this case, ABS-CBN had not yet
filed the required bond; as a matter of fact, it asked for reduction of the bond
and even went to the Court of Appeals to challenge the order on the matter,
Clearly then, it was not necessary for RBS to file a counterbond. Hence, ABSCBN cannot be held responsible for the premium RBS paid for the
counterbond.
Neither could ABS-CBN be liable for the print advertisements for "Maging Sino
Ka Man" for lack of sufficient legal basis. The RTC issued a temporary
restraining order and later, a writ of preliminary injunction on the basis of its
determination that there existed sufficient ground for the issuance thereof.
Notably, the RTC did not dissolve the injunction on the ground of lack of legal
and factual basis, but because of the plea of RBS that it be allowed to put up a
counterbond.
As regards attorney's fees, the law is clear that in the absence of stipulation,
attorney's fees may be recovered as actual or compensatory damages under
58
any of the circumstances provided for in Article 2208 of the Civil Code.

The general rule is that attorney's fees cannot be recovered as part of

damages because of the policy that no premium should be placed on the right
59
to litigate. They are not to be awarded every time a party wins a suit. The
power of the court to award attorney's fees under Article 2208 demands
60
factual, legal, and equitable justification. Even when claimant is compelled to
litigate with third persons or to incur expenses to protect his rights, still
attorney's fees may not be awarded where no sufficient showing of bad faith
could be reflected in a party's persistence in a case other than erroneous
61
conviction of the righteousness of his cause.
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the
Civil Code. Article 2217 thereof defines what are included in moral damages,
while Article 2219 enumerates the cases where they may be recovered, Article
2220 provides that moral damages may be recovered in breaches of contract
where the defendant acted fraudulently or in bad faith. RBS's claim for moral
damages could possibly fall only under item (10) of Article 2219, thereof which
reads:
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29,
30, 32, 34, and 35.
Moral damages are in the category of an award designed to compensate the
claimant for actual injury suffered. and not to impose a penalty on the
62
wrongdoer. The award is not meant to enrich the complainant at the expense
of the defendant, but to enable the injured party to obtain means, diversion, or
amusements that will serve to obviate then moral suffering he has undergone.
It is aimed at the restoration, within the limits of the possible, of the spiritual
63
status quo ante, and should be proportionate to the suffering inflicted. Trial
courts must then guard against the award of exorbitant damages; they should
exercise balanced restrained and measured objectivity to avoid suspicion that
64
it was due to passion, prejudice, or corruption on the part of the trial court.
The award of moral damages cannot be granted in favor of a corporation
because, being an artificial person and having existence only in legal
contemplation, it has no feelings, no emotions, no senses, It cannot, therefore,
experience physical suffering and mental anguish, which call be experienced
65
66
only by one having a nervous system. The statement in People v. Manero
67
and Mambulao Lumber Co. v. PNB
that a corporation may recover moral
damages if it "has a good reputation that is debased, resulting in social
humiliation" is an obiter dictum. On this score alone the award for damages
must be set aside, since RBS is a corporation.

70

in quasi-contracts, if the defendant acted with gross negligence;

and in
contracts and quasi-contracts, if the defendant acted in a wanton, fraudulent,
71
reckless, oppressive, or malevolent manner.
It may be reiterated that the claim of RBS against ABS-CBN is not based on
contract, quasi-contract, delict, or quasi-delict, Hence, the claims for moral and
exemplary damages can only be based on Articles 19, 20, and 21 of the Civil
Code.
The elements of abuse of right under Article 19 are the following: (1) the
existence of a legal right or duty, (2) which is exercised in bad faith, and (3) for
the sole intent of prejudicing or injuring another. Article 20 speaks of the
general sanction for all other provisions of law which do not especially provide
for their own sanction; while Article 21 deals with acts contra bonus mores, and
has the following elements; (1) there is an act which is legal, (2) but which is
contrary to morals, good custom, public order, or public policy, and (3) and it is
72
done with intent to injure.
Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice
or bad faith implies a conscious and intentional design to do a wrongful act for
73
a dishonest purpose or moral obliquity.
Such must be substantiated by
74
evidence.
There is no adequate proof that ABS-CBN was inspired by malice or bad faith.
It was honestly convinced of the merits of its cause after it had undergone
serious negotiations culminating in its formal submission of a draft contract.
Settled is the rule that the adverse result of an action does not per se make the
action wrongful and subject the actor to damages, for the law could not have
meant to impose a penalty on the right to litigate. If damages result from a
75
person's exercise of a right, it is damnum absque injuria.
WHEREFORE, the instant petition is GRANTED. The challenged decision of
the Court of Appeals in CA-G.R. CV No, 44125 is hereby REVERSED except
as to unappealed award of attorney's fees in favor of VIVA Productions,
Inc.1wphi1.nt
No pronouncement as to costs.
SO ORDERED.
Melo, Kapunan, Martinez and Pardo JJ., concur.

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book
IV of the Civil Code. These are imposed by way of example or correction for
the public good, in addition to moral, temperate, liquidated or compensatory
68
damages. They are recoverable in criminal cases as part of the civil liability
69
when the crime was committed with one or more aggravating circumstances;

G.R. No. 118692

July 28, 2006

COASTAL PACIFIC TRADING, INC., petitioner,

vs.
SOUTHERN ROLLING MILLS, CO., INC. (now known as Visayan
Integrated Steel Corporation), FAR EAST BANK & TRUST COMPANY,
1
PHILIPPINE COMMERCIAL INDUSTRIAL BANK, EQUITABLE BANKING
CORPORATION, PRUDENTIAL BANK, BOARD OF TRUSTEESCONSORTIUM OF BANKS-VISCO, UNITED COCONUT PLANTERS BANK,
CITYTRUST BANKING CORPORATION, ASSOCIATED BANK, INSULAR
BANK OF ASIA AND AMERICA, INTERNATIONAL CORPORATE BANK,
COMMER-CIAL BANK OF MANILA, BANK OF THE PHILIPPINE ISLANDS,
NATIONAL STEEL CORPORA-TION, THE PROVINCIAL SHERIFF OF
2
BOHOL, and DEPUTY SHERIFF JOVITO DIGAL, respondents.

DECISION
PANGANIBAN, C.J.:
Directors owe loyalty and fidelity to the corporation they serve and to its
creditors. When these directors sit on the board as representatives of
shareholders who are also major creditors, they cannot be allowed to use their
offices to secure undue advantage for those shareholders, in fraud of other
creditors who do not have a similar representation in the board of directors.
The Case
3

Before us is a Petition for Review under Rule 45 of the Rules of Court,

4
assailing the September 27, 1994 Decision and the January 5, 1995
5
Resolution of the Court of Appeals (CA) in CA-GR CV No. 39385. The
challenged Decision disposed as follows:
"WHEREFORE, the decision of the Regional Trial Court is hereby
6
AFFIRMED in toto."
The challenged Resolution denied reconsideration.
The Facts
Respondent Southern Rolling Mills Co., Inc. was organized in 1959 for the
purpose of engaging in a steel processing business. It was later renamed
7
Visayan Integrated Steel Corporation (VISCO).
On December 11, 1961, VISCO obtained a loan from the Development Bank of
the Philippines (DBP) in the amount of P836,000. This loan was secured by a
duly recorded Real Estate Mortgage over VISCO's three (3) parcels of land,
8
including all the machineries and equipment found there.
9

Afterwards, negotiations were conducted between VISCO and respondent

15
banks for the conversion of the unpaid loan into equity in the corporation.
Vicente Garcia, vice-president of VISCO and of Far East Bank and Trust
16
Company (FEBTC), testified that sometime in 1966, the creditor banks were
17
18
given management of and control over VISCO. In time, in order to
reorganize it, its principal creditors agreed to group themselves into a creditors'
19
consortium. As a result of the reorganized corporate structure of VISCO,
respondent banks acquired more than 90 percent of its equity. Notwithstanding
this conversion, it remained indebted to the Consortium in the amount of
20
P16,123,918.02.
Meanwhile from 1964 to 1965, VISCO also entered into a processing
agreement with Petitioner Coastal Pacific Trading, Inc. ("Coastal"). Pursuant to
that agreement, petitioner delivered 3,000 metric tons of hot rolled steel coils to
VISCO for processing into block iron sheets. Contrary to their agreement, the
latter was able to process and deliver to petitioner only 1,600 metric tons of
those sheets. Hence, a total of 1,400 metric tons of hot rolled steel coils
21
remained unaccounted for. The fact that petitioner was among the major
creditors of VISCO was recognized by the latter's vice-president, Vicente
22
Garcia. Indeed, on October 9, 1970, it forwarded to petitioner a proposal for a
23
Compromise Agreement. Subsequent developments indicate, however, that
the parties did not arrive at a compromise.
Two years later, on October 20, 1972, Garcia wrote Arturo P. Samonte,
24
25
representative of FEBTC and director of VISCO, a letter that reads as
follows:
"In the light of recent development on IISMI and Elirol which were
taken over by the government, I suggest that we take certain
precautionary measures to protect the interests of the Consortium of
Banks. One such step may be to insure the safety of the unexpended
funds of VISCO from any contingencies in the future. As of now
VISCO's account with the Far East Bank is in the name of BOARD OF
TRUSTEES VISCO CONSORTIUM OF BANKS. It may be better to
eliminate the term VISCO and just call the account BOARD OF
26
TRUSTEES CONSORTIUM OF BANKS."

On August 15, 1963, VISCO entered into a Loan Agreement with respondent
10
banks (later referred to as "Consortium" ) for the amount of US$5,776,186.71
or P21,745,707.36 (at the then prevailing exchange rate) to finance its
importation of various raw materials. To secure the full and faithful
performance of its obligation, VISCO executed on August 3, 1965, a second
11
mortgage over the same land, machineries and equipment in favor of
12
respondent banks. This second mortgage remained unrecorded.

According to a notation on this letter, an FEBTC assistant cashier named

27
Silverio duly complied with the above request. Indeed, events would later
reveal that the bank held a deposit account in the name of the "Board of
28
Trustees-Consortium of Banks."

VISCO eventually defaulted in the performance of its obligation to respondent

banks. This prompted the Consortium to file on January 26, 1966, Civil Case
No. 1841, which was a Petition for Foreclosure of Mortgage with Petition for
13
14
Receivership. This case was eventually dismissed for failure to prosecute.

On September 20, 1974, respondent banks held a luncheon meeting in the

FEBTC Boardroom to discuss how they would address the insistent demands
of the DBP for VISCO to settle its obligations. Jose B. Fernandez, Jr., VISCO's
30
then chairman and concurrent FEBTC President,
expressed his

29

apprehension that either the DBP or the government would soon pursue extrajudicial foreclosure against VISCO.

SEVENTY TWO ONLY (P1,550,572) shall be utilized to pay the liability

37
of VISCO with the Development Bank of the Philippines."

In this regard, Fernandez informed the members of the Consortium that he had
received letter-offers from two corporations that were interested in purchasing
31
VISCO's generator sets. After deliberating on the matter, the members
decided to approve the sale of these two generator sets to Filmag (Phil.), Inc. It
was also agreed that the proceeds of the sale would be used to pay VISCO's
32
indebtedness to DBP and to secure the release of the first mortgage. The
Consortium agreed with Filmag on the following payment procedure:

The sale of the generator sets to Filmag took place and, according to the
testimony of Garcia, the proceeds were deposited with FEBTC in a special
38
account held in trust for the Consortium.

"The payment procedure will be as follows: Filmag pays to VISCO;

VISCO pays the Consortium; and then the Consortium pays the DBP
with the arrangement that the Consortium subrogates to the rights of
the DBP as first mortgagee to the VISCO plant. The Consortium
further agreed to call a meeting of the VISCO board of directors for the
purpose of considering and formally approving the proposed sale of
33
the 2 generators to Filmag."
Accordingly, on October 4, 1974, the VISCO board of directors had a meeting
34
in the FEBTC Boardroom. The board was asked to decide how VISCO would
settle its debt to DBP: whether by asking the Consortium to put up the
necessary amount or by accepting Filmag's offer to purchase VISCO's
35
36
generator sets. The latter option was unanimously chosen in a Resolution
worded as follows:
"RESOLVED, That the offer of Filmag (Philippines) Inc. in their letters
of December 14, 1973 and March 19, 1974 to purchase two (2) units of
generator sets, including standard accessories, of VISCO is hereby
accepted under the following terms and conditions:
xxx

xxx

xxx

"2. The price for the two (2) generator sets is PESOS: ONE MILLION
FIVE HUNDRED FIFTY THOUSAND FIVE HUNDRED SEVENTY
TWO ONLY (P1,550,572) x x x and shall be payable upon signing of a
letter-agreement and which shall be later formalized into a Deed of
Sale. The amount, however, shall be held by the depositary bank of
VISCO, Far East Bank and Trust Company, in escrow and shall be at
VISCO's disposal upon the signing of Filmag of the receipt/s of delivery
of the said two (2) generator sets.
xxx

xxx

xxx

"FURTHER RESOLVED, That the sales proceeds of PESOS: ONE

MILLION FIVE HUNDRED FIFTY THOUSAND FIVE HUNDRED

A year after, on May 22, 1975, petitioner filed with the Pasig Regional Trial
39
Court (RTC) a Complaint for Recovery of Property and Damages with
40
Preliminary Injunction and Attachment. Petitioner's allegation was that VISCO
had fraudulently misapplied or converted the finished steel sheets entrusted to
41
it. On June 3, 1975, Judge Pedro A. Revilla issued a Writ of Preliminary
42
Attachment over its properties that were not exempt from execution.
In compliance with the Writ, Sheriff Andres R. Bonifacio attempted to garnish
43
the account of VISCO in FEBTC, which denied holding that account. Instead,
the bank admitted that what it had was a deposit account in the name of the
44
Board of Trustees-Consortium of Banks, particularly Account No. 2479-1.
FEBTC reported to Sheriff Bonifacio that it had instructed its accounting
department to hold the account, "subject to the prior liens or rights in favor of
45
[FEBTC] and other entities."
While petitioner's case was pending, VISCO's vice-president (Garcia) and
director (Arturo Samonte) requested from FEBTC a cash advance of
46
P1,342,656.88 for the full settlement of VISCO's account with DBP. On June
29, 1976, FEBTC complied by issuing Check No. FE239249 for
47
P1,342,656.88, payable to "[DBP] for [the] account of VISCO." On even date,
DBP executed a Deed of Assignment of Mortgage Rights Interest and
48
Participation in favor of Respondent Consortium of Banks. The deed stated
that, in consideration of the payment made, all of DBP's rights under the
mortgage agreement with VISCO were being transferred and conveyed to the
49
Consortium. Thus did the latter obtain DBP's recorded primary lien over the
real and chattel properties of VISCO.
On September 23, 1980, the Consortium filed a Petition for Extra-Judicial
50
Foreclosure with the Office of the Provincial Sheriff of Bohol. The Notice of
Extrajudicial Foreclosure of Mortgage, published in the Bohol Newsweek on
October 10, 1980, announced that the auction sale was scheduled for
51
November 11, 1980.
On November 3, 1980, Southern Industrial Projects, Inc. (SIP), which was a
52
53
judgment creditor of VISCO, filed Civil Case No. 3383. It was a Complaint
for Declaration of Nullity of the Mortgage and Injunction to Restrain the
Consortium from Proceeding with the Auction Sale. SIP argued that DBP had
actually been paid by VISCO with the proceeds from the sale of the generator
sets. Hence, the mortgage in favor of that bank had been extinguished by the

54

payment and could not have been assigned to the Consortium. A temporary
restraining order against the latter was thus successfully obtained; the
provincial sheriff could not proceed with the auction sale of the mortgaged
55
assets. But SIP's victory was short-lived. On March 2, 1984, Civil Case No.
56
3383 was decided in favor of the Consortium. Judge Andrew S. Namocatcat
ruled thus:
"The evidence of the plaintiff is only anchored on the fact that the deed
of assignment executed by the DBP in favor of the defendant banks is
an act which would defraud creditors. It is the thinking of the court that
the payment of defendant banks to DBP of VISCO's loan and the
execution of the DBP of the deed of assignment of credit and rights to
the defendant banks is in accordance with Article 1302 and 1303 of the
New Civil Code, and said transaction is not to defraud creditors
57
because the defendant banks are also creditors of VISCO."

71

On August 20, 1985, a temporary restraining order (TRO) was issued by

Judge Mercedes Gozo-Dadole against VISCO, enjoining it from proceeding
with the removal or disposal of its properties; the execution and/or
consummation of the foreclosure sale; and the sale of the foreclosed properties
to NSC. On September 6, 1985, the trial court issued an Order requiring the
Consortium to post a bond of P25 million in favor of Coastal for damages that
petitioner may suffer from the lifting of the TRO. The bond filed was then
72
approved by the RTC in its Order of September 13, 1985.
On December 15, 1986, Civil Case No. 21272 was finally decided by Judge
73
Nicolas P. Lapena, Jr., in favor of Coastal. VISCO was ordered to pay
petitioner the sum of P851,316.19 with interest at the legal rate, plus attorney's
74
75
fees of P50,000.00 and costs. Coastal filed a Motion for Execution, but the
judgment has remained unsatisfied to date.
76

On June 14, 1985, this Decision was affirmed by the Intermediate Appellate
58
Court in CA-GR No. 03719.
The auction sale of VISCO's mortgaged properties took place on March 19,
59
1985 and the Consortium emerged as the highest bidder. The Certificate of
60
61
Sale in its favor was registered on May 22, 1985.
On June 27, 1985, VISCO executed through Vicente Garcia, a Deed of
62
Assignment of Right of Redemption in favor of the National Steel Corporation
63
(NSC), in consideration of P100,000. On the same day, the Consortium sold
64
the foreclosed real and personal properties of VISCO to the NSC.
On August 16, 1985, petitioner filed against respondents Civil Case No. 3929,
which was a Complaint for Annulment or Rescission of Sale, Damages with
65
Preliminary Injunction. Coastal alleged that, despite the Writ of Attachment
issued in its favor in the still pending Civil Case No. 21272, the Consortium had
sold the properties to NSC. Further, despite the attachment of the properties,
the Consortium was allegedly able to sell and place them beyond the reach of
66
VISCO's other creditors. Thus imputing bad faith to respondent banks'
actions, petitioner said that the sale was intended to defraud VISCO's other
creditors.
Petitioner further contended that the assignment in favor of the Consortium
was fraudulent, because DBP had been paid with the proceeds from the sale
of the generator sets owned by VISCO, and not with the Consortium's own
67
68
funds. Petitioner offered as proof the minutes of the meeting in which the
transaction was decided. Respondent Consortium countered that the minutes
would in fact readily disclose that the intention of its members was to apply the
69
proceeds to a partial payment to DBP. Respondent insisted that it used its
70
own funds to pay the bank.

On January 5, 1992, a Decision

follows:

on Civil Case No. 3929 was rendered as

"WHEREFORE, this Court hereby renders judgment in favor of the

defendants and against the plaintiff Coastal Pacific Trading, Inc. BY
WAY OF THE MAIN COMPLAINT, to wit:
"1. Declaring the extrajudicial foreclosure sale conducted by
the sheriff and the corresponding certificate of sale executed
by the defendant sheriffs on March 15, 1985 relative to the real
properties of the defendant SRM/VISCO of Cortes, Bohol,
Philippines, which were registered in the Register of Deeds of
Bohol, on May 22, 1985 and the Transfer of Assignment to the
defendant National Steel Corporation of any or part of the
foreclosed properties arising from the extrajudicial foreclosure
sale as valid and legal;
"2. Ordering the plaintiff Coastal Pacific Trading Inc. to pay the
defendant Consortium of Banks[,] Southern Rolling Mills, Co.,
Inc., Far East Bank & Trust Company, Philippine Commercial
Industrial Bank, Equitable Banking Corporation, Prudential
Bank, Board of Trustees-Consortium of Banks- [VISCO],
United Coconut Planters Bank, City Trust Banking
Corporation, Associated Bank, Insular Bank of Asia and
America, International Corporate Bank, Commercial Bank of
Manila, Bank of the Philippine Islands and the National Steel
Corporation in the instant case the amount of FIVE HUNDRED
THOUSAND PESOS (P500,000.00) representing damages;

"3. Ordering the plaintiff The (sic) Coastal Pacific Trading Inc.
to pay the defendants the amount of FIFTEEN THOUSAND
PESOS (P15,000.00) representing attorney's fees;
"4. Dismissing the Amended Complaint of the plaintiff;
"5. Ordering the plaintiff to pay the cost; AND
"BY WAY OF CROSS CLAIM INTERPOSED
"BY THE DEFENDANT National Steel Corporation against the
Consortium of Banks and SRM/VISCO, the same is dismissed for lack
77
of merit, without pronouncement as to cost."
Insisting that the trial court erred in holding that it had failed to prove its case
by preponderance of evidence, Coastal filed an appeal with the CA. Allegedly,
the purported insufficiency of proof was based on the sole ground that
petitioner did not file an objection when the properties were sold on execution.
It contended that the court a quo had arrived at this erroneous conclusion by
78
relying on inapplicable jurisprudence.
Additionally, Coastal argued that the trial court had erred in not annulling the
foreclosure proceedings and sale for being fictitious and done to defraud
petitioner as VISCO's creditor. Supposedly, the DBP mortgage had already
been extinguished by payment; thus, the bank could not have assigned the
79
contract to the Consortium.
Petitioner also prayed for the annulment of the sale in favor of NSC on the
ground that the latter was a party to the fraudulent foreclosure and, hence, not
80
a buyer in good faith.

Ruling of the Court of Appeals

At the outset, the CA stressed that the validity of the Consortium's mortgage,
foreclosure, and assignments had already been upheld in CA-GR CV No.
81
03719, entitled Southern Industrial Projects v. United Coconut Planters Bank
82
Citing Valencia v. RTC of Quezon City, Br. 90 and Vda. de Cruzo v.
83
Carriaga, the CA explained that the absolute identity of parties was not
necessary for the application of res judicata. All that was required was a
shared identity of interests, as shown by the identity of reliefs sought by one
person in a prior case and by another in a subsequent case.

While Coastal was not a party to Southern Industrial Projects, it should

nevertheless be bound by that Decision, because it had raised substantially the
same claim and cause of action as SIP, according to the appellate court. The
CA held that the basic reliefs sought by Coastal and SIP were substantially the
same: the nullification of the Deed of Assignment in favor of the Consortium,
the foreclosure sale, and the subsequent sale to NSC. Because this identity of
reliefs sought showed an identity of interests, the CA concluded that it need not
84
rule on those issues.
As to the issue that the DBP mortgage had been extinguished by payment, the
CA quoted its earlier Decision in Southern Industrial Projects:
"The evidence shows that the proceeds of the sale of the two
generating sets were applied by defendants-appellees in the payment
of the outstanding obligation of VISCO. It appears that said proceeds
were deposited in the bank account of the consortium of creditors to
avoid it being garnished by the creditors notwithstanding the set-off,
VISCO was still indebted to the defendants-appellees.
"The evidence x x x shows that upon VISCO's request for [cash]
advance, the Far East Banks (sic) and Trust Co., the manager of the
consortium of creditors, issued FEBTC check No. 239249 on June 29,
1976 in the amount of P1,342,656.68 payable to the DBP to pay off its
loan to the latter.
xxx

xxx

xxx

"x x x. A public document celebrated with all the legal formalities under
the safeguard of notarial certificate is evidence against a party, and a
high degree [of] proof is necessary to overcome the legal presumption
that the recital is true. The biased and interested testimony of one of
the parties to such instrument who attempts to vary or repudiate what it
purports to be, cannot overcome the evidentiary force of what is
85
recited in the document."
The appellate court also rejected petitioner's contention that the Consortium's
Petition for Extrajudicial Foreclosure was already barred by the earlier resort to
a judicial foreclosure. The CA clarified that in filing a Petition for Judicial
Foreclosure, the Consortium had pursued its right as junior encumbrancer. On
the other hand, the Consortium filed a Petition for Extrajudicial Foreclosure as
86
a first encumbrancer by virtue of DBP's assignment in its favor.
The CA also rejected petitioner's theory of extinguishment of obligation by
merger. It observed that the merger could not have possibly taken place,
because respondent banks and VISCO were not creditors and debtors in their
87
own right.

88

Petitioner's Motion for Reconsideration, which was received by the CA on

89
November 15, 1994, was denied for lack of merit.

First Issue:
Res judicata
93

90

The CA cited Valencia v. RTC of Quezon City to support the finding that SIP
and Coastal were substantially the same parties. We distinguish.

Hence, this Petition.

Issues
Petitioner raises the following issues for our consideration:
"I
"Respondent Court of Appeals, seemingly to avoid the irrefutable
evidence of fraud and collusion practised by [respondents] against
[Petitioner] Coastal, erroneously sustained the trial court's holding that
the present case is barred by res judicata because of the previous
decision in the case of Southern Industrial Projects, Inc., vs. United
Coconut Planters Bank, CA-G.R. No. 03719, considering that the
elements that call for the application of this rule are not present in the
case at bar, and the exceptions allowed by this Honorable Supreme
Court are not applicable here for variance or distinction in facts and
91
issues, x x x:"
"II
"Respondent Court of Appeals further erred in not annulling the Deed
of Assignment of the DBP mortgage x x x, the extrajudicial foreclosure
proceedings of the two mortgages x x x, and the separate sale of the
land and machineries as real and personal properties by the
foreclosing banks to NSC, as well as the assignment or waiver of
SRM/Visco's legal right of redemption over the foreclosed properties,
for being fraudulently executed through collusion among the
[respondents] and in fraud of SRM/Visco's creditor, [Petitioner]
92
Coastal, x x x;"
Stripped of nonessentials, the two issues may be restated as follows:
1. Whether the present action is barred by res judicata
2. Whether respondents disposed of VISCO's assets in fraud of the
creditors
The Court's Ruling
The Petition is meritorious.

In Valencia, the plaintiff-intervenor in the first case, Cario, claimed Lot 4

based on an alleged purchase of Valencia's "squatter's rights" over the
property. The trial court dismissed the claim and held that no such purchase
94
ever took place. It also held that, on the assumption that a sale had taken
place, the sale was null and void for being contrary to the pertinent housing
law. It also found that all current occupants of Lot 4 were illegal squatters; thus,
it ordered their ejectment.
When this first case attained finality, Carino's daughter, Catbagan, filed another
suit against Valencia. Catbagan challenged the applicability of the ejectment
Order issued to her; as an occupant of the lot, she was allegedly not a party to
95
the first case. Her Petition was denied for lack of merit.
The execution of the Decision in the first case was again forestalled when
Llanes, Cario's sister-in-law who was another occupant of Lot 4, filed another
suit against the same respondent. Like Cario, Llanes insisted on having
96
purchased the subject lot from Valencia. This Court ruled that the suit was
barred by res judicata. There was a substantial identity of parties, because the
right claimed by both Cario and Llanes were based on each one's alleged
97
purchase of Valencia's "squatter's rights."
In the first case, sales of "squatter's rights" were already categorically declared
null and void for being contrary to law. Thus, Llanes' admission that she had
purchased Valencia's "squatter's rights" placed her in the same category as
Cario. The purchase could not be treated differently, because the final and
executory Decision held that all purchases of "squatter's rights" (regardless of
98
who the purchasers were) were null and void.
Further, the earlier ruling held that "the present occupants are illegal
squatters." That ruling included Llanes, who was admittedly one of the
99
occupants. Simply put, she and Valencia were considered identical parties for
purposes of res judicata, because they were obviously litigating under the
same void title and capacity as vendees of "squatter's rights" and as occupants
of Lot 4.
Moreover, we held in Valencia that Llanes' suit was merely a clear attempt to
prevent or delay the execution of the judgment in the first case, which had
become final by reason of the three affirmances by this Court. The pattern to
obstruct the execution of the first judgment was obvious: after Cario lost the
first case, her daughter filed a second one. When the daughter lost the second,

the daughter-in-law filed a third case. It may be observed that the three
successive plaintiffs were all occupants of the same property and belonged to
the same family; this fact was also indicative of their privity.
Given this background, it becomes clear that the finding of a substantial
identity of parties in Valencia was based on its peculiar factual circumstances,
which are different from those in the present case.
Unlike Llanes, Coastal is not asserting a right that has been categorically
declared null and void in a prior case. In fact, its right based on the processing
agreement was upheld in Civil Case No. 21272. Clearly, Coastal cannot be
treated in the same manner as Llanes.
The CA erred in applying Southern Industrial Projects v. United Coconut
100
Planters Bank as a bar by res judicata with respect to the present case. For
this principle to apply, the following elements must concur: a) the former
judgment was final; b) the court that rendered it had jurisdiction over the
subject matter and the parties; c) the judgment was based on the merits; and,
d) between the first and the second actions, there is an identity of parties,
101
subject matters, and causes of action.
It is axiomatic that res judicata does not require an absolute, but only a
substantial, identity of parties. There is a substantial identity when there is
privity between the two parties or they are successors-in-interest by title
subsequent to the commencement of the action, litigating for the same thing,
102
under the same title, and in the same capacity. Petitioner was not acting in
the same capacity as SIP when it filed Civil Case No. 3383, which eventually
became AC-GR CV No. 03719. It brought this latter action as a creditor under
a processing agreement with VISCO; on the other hand, the latter was sued by
SIP, based on an alleged breach of their management contract. Very clearly,
their rights were entirely distinct and separate from each other. In no manner
were these two creditors privies of each other.
The causes of action in the two Complaints were also different. Causes of
action arise from violations of rights. A single right may be violated by several
acts or omissions, in which case the plaintiff has only one cause of action.
Likewise, a single act or omission may violate several rights at the same time,
as when the act constitutes a violation of separate and distinct legal
103
obligations.
The violation of each of these separate rights is a separate
104
cause of action in itself. Hence, although these causes of action arise from
the same state of facts, they are distinct and independent and may be litigated
105
separately; recovery on one is not a bar to subsequent actions on the others.
In the present case, the right of SIP (arising from its management contract with
VISCO) is totally distinct and separate from the right of Coastal (arising from its
processing contract with VISCO). SIP and Coastal are asserting distinct rights

arising from different legal obligations of the debtor corporation. Thus, VISCO's
violation of those separate rights has given rise to separate causes of action.
The confusion in the resolution of the issue of identity of parties occurred,
because the two creditors were assailing the same transactions of VISCO on
the same grounds. Since the two cases they filed presented similar legal
issues, the appellate court held that its ruling in AC-GR CV No. 03719 was also
applicable to the instant case.
Common but palpable is this misconception of the doctrine of res judicata.
Persons do not become privies by the mere fact that they are interested in the
same question or in proving the same set of facts, or that one person is
interested in the result of a litigation involving the other. Hence, several
creditors of one debtor cannot be considered as identical parties for the
purpose of assailing the acts of the debtor. They have distinct credits, rights,
and interests, such that the failure of one to recover should not preclude the
other creditors from also pursuing their legal remedies.
Further, petitioner, which was not a party to Southern Industrial Projects (their
causes of action being separate and distinct), did not have the opportunity to
be heard in that case, much less to present its own evidence. Thus, to bind
petitioner to the Decision in that case would clearly violate its rights to due
process. As a separate party, it has the right to have its arguments and
evidence evaluated on their own merits.
Second Issue:
Fraud of Creditors
We now come to the heart of the Petition. Coastal alleges that the assignment
of mortgage, the extrajudicial foreclosure proceedings, and the sale of the
properties of VISCO should all be rescinded on the ground that they were done
to defraud the latter's creditors.
The CA found no merit in petitioner's arguments. It ruled that the assignment
conformed to the requirements of law; that the consideration for the
assignment had allegedly been given by FEBTC; and that, hence, the
Consortium had a right to foreclose on the mortgaged properties.
By focusing on the innate validity of these Contracts, the CA totally overlooked
the issue of fraud as a ground for rescission. Elementary is the principle that
the validity of a contract does not preclude its rescission. Under Articles 1380
and 1381 (3) of the Civil Code, contracts that are otherwise valid between the
contracting parties may nonetheless be subsequently rescinded by reason of
106
injury to third persons, like creditors. In fact, rescission implies that there is a
contract that, while initially valid, produces a lesion or pecuniary damage to
107
someone.
Thus, when the CA confined itself to the issue of the validity of

these contracts, it did not at all address the heart of petitioner's cause of action:
whether these transactions had been undertaken by the Consortium to defraud
VISCO's other creditors.
There is more than a preponderance of evidence showing the Consortium's
deliberate plan to defraud VISCO's other creditors.
Consortium Banks as Directors
It will be recalled that Respondent Consortium took over management and
control of VISCO by acquiring 90 percent of the latter's equity. Thus, 9 out of
108
the 10 directors of the corporation were all officials of the Consortium, which
may thus be said to have effectively occupied and/or controlled the board.
Significantly, nowhere in the records can we find any denial by respondent of
109
this allegation by petitioner.
As directors of VISCO, the officials of the Consortium were in a position of
trust; thus, they owed it a duty of loyalty. This trust relationship sprang from the
fact that they had control and guidance over its corporate affairs and
110
property. Their duty was more stringent when it became insolvent or without
sufficient assets to meet its outstanding obligations that arose. Because they
were deemed trustees of the creditors in those instances, they should have
managed the corporation's assets with strict regard for the creditors' interests.
When these directors became corporate creditors in their own right, they
should not have permitted themselves to secure any undue advantage over
111
other creditors.
In the instant case, the Consortium miserably failed to
observe its duty of fidelity towards VISCO and its creditors.
Duty of the Consortium Banks
to VISCO's Creditors
Recall that as early as 1966, the Consortium, through its directors on the board
of VISCO, had already assumed management and control over the latter.
Hence, when VISCO recognized its outstanding liability to petitioner in 1970
112
and offered a Compromise Agreement,
respondent banks were already at
the helm of the debtor corporation. The members of the Consortium, therefore,
cannot deny that they were aware of those claims against the corporation.
Nonetheless, they did not adopt any measure to protect petitioner's credit.
Quite the opposite, they even took steps to hide VISCO's unexpended funds.
Garcia's 1972 letter to Samonte unmistakably reveals that they kept those
funds in an account named "Board of Trustees VISCO Consortium of Banks."
This fact alone shows an effort to hide, with the evident intent to keep, those
funds for themselves. The letter even says that, for the protection of the
Consortium, the name "VISCO" should be eliminated entirely, so that the
account name would read "Board of Trustees Consortium of Banks." Clearly,

this particular move was found to be necessary to avoid a takeover by the

113
government, which was also a creditor of VISCO. This express intent of the
latter, under the direction and for the benefit of the Consortium, corroborated
petitioner's contention that respondent banks had defrauded VISCO's
creditors.
Assignment of Mortgage
in Favor of the Consortium Banks
The assignment of mortgage in favor of the Consortium also bears the
earmarks of fraud. Initially, respondent banks had agreed that VISCO should
sell two of its generator sets, so that the proceeds could be utilized to pay
DBP. This plan was direct, simple, and would extinguish the encumbrance in
favor of the bank.
Then, quite surprisingly, the Consortium set down the following payment
procedure: Filmag would pay VISCO; the latter would pay the Consortium,
which would pay DBP; and the Consortium would then subrogate DBP to the
latter's rights as first mortgagee. One is then led to ask: if the intention was to
pay DBP; from the sales proceeds of the generator sets, why did the money
have to pass through the Consortium?
The answer lies in the nature of respondent's mortgage. It will be recalled that
this mortgage remained unrecorded and not legally binding on the other
114
creditors.
Thus, if DBP had been directly paid by VISCO, the latter could
have freed up its properties to the satisfaction of all its other creditors. This
procedure would have been fair to all, but it was not followed by the
Consortium.
Instead, the proceeds from the sale of the generator sets were first paid to
respondent banks, which used the money to pay DBP. The last step in the
payment procedure explains the reason for this preferred though roundabout
manner of payment. This final step entitled the Consortium to obtain DBP's
primary lien through an assignment by allowing it to pay VISCO's loan to the
bank, without incurring additional expenses.
In the end, by collecting the money from VISCO, respondent banks recovered
what they had ostensibly remitted to DBP. Moreover, the primary lien that
respondent banks acquired allowed them, as unsecured creditors of VISCO, to
foreclose on the assets of the corporation without regard to its inferior claims. It
was a clever ruse that would have worked, were it not done by creditors who
were duty-bound, as directors, not to take clever advantage of other creditors.
To be sure, there was undue advantage. The payment scheme devised by the
Consortium continued the efficacy of the primary lien, this time in its favor, to
the detriment of the other creditors. When one considers its knowledge that

VISCO's assets might not be enough to meet its obligations to several

115
creditors, the intention to defraud the other creditors is even more striking.
116
Fraud is present when the debtor knows that its actions would cause injury.
The assignment in favor of the Consortium was a rescissible contract for
117
having been undertaken in fraud of creditors. Article 1385 of the Civil Code
provides for the effect of rescission, as follows:
"Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its
interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore.
"Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third persons who
did not act in bad faith.
"In this case, indemnity for damages may be demanded from the
person causing the loss."
Indeed, mutual restitution is required in all cases involving rescission. But when
it is no longer possible to return the object of the contract, an indemnity for
damages operates as restitution. The important consideration is that the
indemnity for damages should restore to the injured party what was lost.
In the case at bar, it is no longer possible to order the return of VISCO's
properties. They have already been sold to the NSC, which has not been
shown to have acted in bad faith. The party alleging bad faith must establish it
by competent proof. Sans that proof, purchasers are deemed to be in good
faith, and their interest in the subject property must not be disturbed.
Purchasers in good faith are those who buy the property of another without
notice that some other person has a right to or interest in the property; and who
pay the full and fair price for it at the time of the purchase, or before they get
118
notice of some other persons' claim of interest in the property.
In the present case, petitioner failed to discharge its burden of proving bad faith
on the part of NSC. There is insufficient evidence on record that the latter
participated in the design to defraud VISCO's creditors. To NSC, petitioner
imputes fraud from the sole fact that the former was allegedly aware that its
vendor, the Consortium, had taken control over VISCO including the
119
corporation's assets. We cannot appreciate how knowledge of the takeover
would necessarily implicate anyone in the Consortium's fraudulent designs.
Besides, NSC was not shown to be privy to the information that VISCO had no
other assets to satisfy other creditors' respective claims.

The right of an innocent purchaser for value must be respected and protected,
120
even if its vendors obtained their title through fraud.
Pursuant to this
principle, the remedy of the defrauded creditor is to sue for damages against
those who caused or employed the fraud. Hence, petitioner is entitled to
damages from the Consortium.
Award of Damages
It is essential that for damages to be awarded, a claimant must satisfactorily
prove during the trial that they have a factual basis, and that the defendant's
121
acts have a causal connection to them.
Thus, the question of damages
should normally call for a remand of the case to the lower court for further
proceedings. Considering, however, the length of time that petitioner's just
claim has been thwarted, we find it in the best interest of substantial justice to
decide the issue of damages now on the basis of the available records. A
remand for further proceedings would only result in a needless delay.
Going over the records of the case, we find that petitioner has a final and
executory judgment in its favor in Civil Case No. 21272. The judgment in that
case reads as follows:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs
ordering defendant VISCO/SRM to pay the plaintiffs the sum of
P851,316.19 with interest thereon at the legal rate from the filing of this
122
complaint, plus attorney's fees of P50,000.00 and to pay the costs."
The foregoing is the judgment credit that petitioner cannot enforce against
VISCO because of Respondent Consortium's fraudulent disposition of the
corporation's assets. In other words, the above amounts define the extent of
the actual damage suffered by Coastal and the amount that respondent has to
restore pursuant to Article 1385.
On the basis of the finding of fraud, the award of exemplary damages is in
order, to serve as a warning to other creditors not to abuse their rights. Under
Article 2229 of the Civil Code, exemplary or corrective damages are imposed
by way of example or correction for the public good. By their nature, exemplary
damages should be imposed in an amount sufficient and effective to deter
possible future similar acts by respondent banks. The court finds the amount of
P250,000 sufficient in the instant case.
As a rule, a corporation is not entitled to moral damages because, not being a
natural person, it cannot experience physical suffering or sentiments like
123
wounded feelings, serious anxiety, mental anguish and moral shock.
The
only exception to this rule is when the corporation has a good reputation that is
124
debased, resulting in its humiliation in the business realm.
In the present
case, the records do not show any evidence that the name or reputation of

petitioner has been sullied as a result of the Consortium's fraudulent acts.

Accordingly, moral damages are not warranted.
WHEREFORE, the Petition is GRANTED. The assailed Decision of the Court
of Appeals dated September 27, 1994, and its Resolution dated January 5,
1995, are hereby REVERSED and SET ASIDE. Respondent Consortium of
Banks is ordered to PAY Petitioner Coastal Pacific Trading, Inc., the sum
adjudged by the Regional Trial Court of Pasig, Branch 167, in Civil Case No.
21272 entitled Coastal Pacific Trading, Felix de la Costa, and Aurora del
Banco v. Visayan Integrated Corporation, to wit: "x x x the sum of P851,316.19
with interest thereon at the legal rate from the filing of [the] [C]omplaint, plus
attorney's fees of P50,000 and x x x the costs." Respondent Consortium of
Banks is further ordered to pay petitioner exemplary damages in the amount of
P250,000.
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Callejo, Sr., Chico-Nazario, J.J., concur.

G.R. No. 141994

January 17, 2005

FILIPINAS BROADCASTING NETWORK, INC., petitioner,

vs.
AGO MEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIAN
COLLEGE OF MEDICINE, (AMEC-BCCM) and ANGELITA F. AGO,
respondents.

Second: Earlier AMEC students in Physical Therapy had complained that

the course is not recognized by DECS. xxx
Third: Students are required to take and pay for the subject even if the
subject does not have an instructor - such greed for money on the part of
AMECs administration. Take the subject Anatomy: students would pay for
the subject upon enrolment because it is offered by the school. However there
would be no instructor for such subject. Students would be informed that
course would be moved to a later date because the school is still searching for
the appropriate instructor.

DECISION
CARPIO, J.:
The Case
1

xxx

This petition for review assails the 4 January 1999 Decision and 26 January
2000 Resolution of the Court of Appeals in CA-G.R. CV No. 40151. The Court
3
of Appeals affirmed with modification the 14 December 1992 Decision of the
Regional Trial Court of Legazpi City, Branch 10, in Civil Case No. 8236. The
Court of Appeals held Filipinas Broadcasting Network, Inc. and its
broadcasters Hermogenes Alegre and Carmelo Rima liable for libel and
ordered them to solidarily pay Ago Medical and Educational Center-Bicol
Christian College of Medicine moral damages, attorneys fees and costs of suit.
The Antecedents
4

"Expos" is a radio documentary program hosted by Carmelo Mel Rima

5
("Rima") and Hermogenes Jun Alegre ("Alegre"). Expos is aired every
morning over DZRC-AM which is owned by Filipinas Broadcasting Network,
Inc. ("FBNI"). "Expos" is heard over Legazpi City, the Albay municipalities and
6
other Bicol areas.
In the morning of 14 and 15 December 1989, Rima and Alegre exposed
various alleged complaints from students, teachers and parents against Ago
Medical and Educational Center-Bicol Christian College of Medicine ("AMEC")
and its administrators. Claiming that the broadcasts were defamatory, AMEC
and Angelita Ago ("Ago"), as Dean of AMECs College of Medicine, filed a
7
complaint for damages against FBNI, Rima and Alegre on 27 February 1990.
Quoted are portions of the allegedly libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking medical
course at AMEC-BCCM, advise them to pass all subjects because if they
fail in any subject they will repeat their year level, taking up all subjects
including those they have passed already. Several students had
approached me stating that they had consulted with the DECS which told them
that there is no such regulation. If [there] is no such regulation why is AMEC
doing the same?

xxx
It is a public knowledge that the Ago Medical and Educational Center has
survived and has been surviving for the past few years since its inception
because of funds support from foreign foundations. If you will take a look at the
AMEC premises youll find out that the names of the buildings there are foreign
soundings. There is a McDonald Hall. Why not Jose Rizal or Bonifacio Hall?
That is a very concrete and undeniable evidence that the support of foreign
foundations for AMEC is substantial, isnt it? With the report which is the basis
of the expose in DZRC today, it would be very easy for detractors and enemies
of the Ago family to stop the flow of support of foreign foundations who assist
the medical school on the basis of the latters purpose. But if the purpose of the
institution (AMEC) is to deceive students at cross purpose with its reason for
being it is possible for these foreign foundations to lift or suspend their
8
donations temporarily.
xxx
On the other hand, the administrators of AMEC-BCCM, AMEC Science
High School and the AMEC-Institute of Mass Communication in their
effort to minimize expenses in terms of salary are absorbing or continues
to accept "rejects". For example how many teachers in AMEC are former
teachers of Aquinas University but were removed because of immorality? Does
it mean that the present administration of AMEC have the total definite moral
foundation from catholic administrator of Aquinas University. I will prove to you
my friends, that AMEC is a dumping ground, garbage, not merely of moral
and physical misfits. Probably they only qualify in terms of intellect. The
Dean of Student Affairs of AMEC is Justita Lola, as the family name implies.
She is too old to work, being an old woman. Is the AMEC administration
exploiting the very [e]nterprising or compromising and undemanding Lola?
Could it be that AMEC is just patiently making use of Dean Justita Lola were if
she is very old. As in atmospheric situation zero visibility the plane cannot
land, meaning she is very old, low pay follows. By the way, Dean Justita Lola is

also the chairman of the committee on scholarship in AMEC. She had retired
from Bicol University a long time ago but AMEC has patiently made use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground for moral and
physically misfit people. What does this mean? Immoral and physically misfits
as teachers.
May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this,
that your are no longer fit to teach. You are too old. As an aviation, your case is
zero visibility. Dont insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the
scholarship committee at that. The reason is practical cost saving in salaries,
because an old person is not fastidious, so long as she has money to buy the
ingredient of beetle juice. The elderly can get by thats why she (Lola) was
taken in as Dean.
xxx
xxx On our end our task is to attend to the interests of students. It is likely that
the students would be influenced by evil. When they become members of
society outside of campus will be liabilities rather than assets. What do
you expect from a doctor who while studying at AMEC is so much burdened
with unreasonable imposition? What do you expect from a student who aside
from peculiar problems because not all students are rich in their struggle to
9
improve their social status are even more burdened with false regulations. xxx
(Emphasis supplied)
The complaint further alleged that AMEC is a reputable learning institution.
With the supposed exposs, FBNI, Rima and Alegre "transmitted malicious
imputations, and as such, destroyed plaintiffs (AMEC and Ago) reputation."
AMEC and Ago included FBNI as defendant for allegedly failing to exercise
due diligence in the selection and supervision of its employees, particularly
Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an
10
Answer alleging that the broadcasts against AMEC were fair and true. FBNI,
Rima and Alegre claimed that they were plainly impelled by a sense of public
duty to report the "goings-on in AMEC, [which is] an institution imbued with
public interest."

Thereafter, trial ensued. During the presentation of the evidence for the
defense, Atty. Edmundo Cea, collaborating counsel of Atty. Lozares, filed a
11
Motion to Dismiss on FBNIs behalf. The trial court denied the motion to
dismiss. Consequently, FBNI filed a separate Answer claiming that it exercised
due diligence in the selection and supervision of Rima and Alegre. FBNI
claimed that before hiring a broadcaster, the broadcaster should (1) file an
application; (2) be interviewed; and (3) undergo an apprenticeship and training
program after passing the interview. FBNI likewise claimed that it always
reminds its broadcasters to "observe truth, fairness and objectivity in their
broadcasts and to refrain from using libelous and indecent language."
Moreover, FBNI requires all broadcasters to pass the Kapisanan ng mga
Brodkaster sa Pilipinas ("KBP") accreditation test and to secure a KBP permit.
12

On 14 December 1992, the trial court rendered a Decision finding FBNI and
Alegre liable for libel except Rima. The trial court held that the broadcasts are
libelous per se. The trial court rejected the broadcasters claim that their
utterances were the result of straight reporting because it had no factual basis.
The broadcasters did not even verify their reports before airing them to show
good faith. In holding FBNI liable for libel, the trial court found that FBNI failed
to exercise diligence in the selection and supervision of its employees.
In absolving Rima from the charge, the trial court ruled that Rimas only
participation was when he agreed with Alegres expos. The trial court found
Rimas statement within the "bounds of freedom of speech, expression, and of
the press." The dispositive portion of the decision reads:
WHEREFORE, premises considered, this court finds for the plaintiff.
Considering the degree of damages caused by the controversial
utterances, which are not found by this court to be really very serious
and damaging, and there being no showing that indeed the enrollment of
plaintiff school dropped, defendants Hermogenes "Jun" Alegre, Jr. and
Filipinas Broadcasting Network (owner of the radio station DZRC), are hereby
jointly and severally ordered to pay plaintiff Ago Medical and Educational
Center-Bicol Christian College of Medicine (AMEC-BCCM) the amount of
P300,000.00 moral damages, plus P30,000.00 reimbursement of attorneys
fees, and to pay the costs of suit.
SO ORDERED.

13

(Emphasis supplied)

Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and
Ago, on the other, appealed the decision to the Court of Appeals. The Court of
Appeals affirmed the trial courts judgment with modification. The appellate
court made Rima solidarily liable with FBNI and Alegre. The appellate court
denied Agos claim for damages and attorneys fees because the broadcasts
were directed against AMEC, and not against her. The dispositive portion of
the Court of Appeals decision reads:

WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to

the modification that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable
with FBN[I] and Hermo[g]enes Alegre.
SO ORDERED.

FBNI raises the following issues for resolution:

I. WHETHER THE BROADCASTS ARE LIBELOUS;

14

II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;

FBNI, Rima and Alegre filed a motion for reconsideration which the Court of
Appeals denied in its 26 January 2000 Resolution.
Hence, FBNI filed this petition.

III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER;

and

15

IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND

ALEGRE FOR PAYMENT OF MORAL DAMAGES, ATTORNEYS
FEES AND COSTS OF SUIT.

The Ruling of the Court of Appeals

The Court of Appeals upheld the trial courts ruling that the questioned
broadcasts are libelous per se and that FBNI, Rima and Alegre failed to
overcome the legal presumption of malice. The Court of Appeals found Rima
and Alegres claim that they were actuated by their moral and social duty to
inform the public of the students gripes as insufficient to justify the utterance of
the defamatory remarks.
Finding no factual basis for the imputations against AMECs administrators, the
Court of Appeals ruled that the broadcasts were made "with reckless disregard
as to whether they were true or false." The appellate court pointed out that
FBNI, Rima and Alegre failed to present in court any of the students who
allegedly complained against AMEC. Rima and Alegre merely gave a single
name when asked to identify the students. According to the Court of Appeals,
these circumstances cast doubt on the veracity of the broadcasters claim that
they were "impelled by their moral and social duty to inform the public about
the students gripes."
The Court of Appeals found Rima also liable for libel since he remarked that
"(1) AMEC-BCCM is a dumping ground for morally and physically misfit
teachers; (2) AMEC obtained the services of Dean Justita Lola to minimize
expenses on its employees salaries; and (3) AMEC burdened the students
16
with unreasonable imposition and false regulations."
The Court of Appeals held that FBNI failed to exercise due diligence in the
selection and supervision of its employees for allowing Rima and Alegre to
make the radio broadcasts without the proper KBP accreditation. The Court of
Appeals denied Agos claim for damages and attorneys fees because the
libelous remarks were directed against AMEC, and not against her. The Court
of Appeals adjudged FBNI, Rima and Alegre solidarily liable to pay AMEC
moral damages, attorneys fees and costs of suit.1awphi1.nt
Issues

The Courts Ruling

We deny the petition.
This is a civil action for damages as a result of the allegedly defamatory
17
remarks of Rima and Alegre against AMEC. While AMEC did not point out
clearly the legal basis for its complaint, a reading of the complaint reveals that
AMECs cause of action is based on Articles 30 and 33 of the Civil Code.
18
Article 30 authorizes a separate civil action to recover civil liability arising
19
from a criminal offense. On the other hand, Article 33 particularly provides
that the injured party may bring a separate civil action for damages in cases of
20
defamation, fraud, and physical injuries. AMEC also invokes Article 19 of the
21
Civil Code to justify its claim for damages. AMEC cites Articles 2176 and
22
2180 of the Civil Code to hold FBNI solidarily liable with Rima and Alegre.
I.
Whether the broadcasts are libelous
23

A libel is a public and malicious imputation of a crime, or of a vice or defect,

real or imaginary, or any act or omission, condition, status, or circumstance
tending to cause the dishonor, discredit, or contempt of a natural or juridical
24
person, or to blacken the memory of one who is dead.
There is no question that the broadcasts were made public and imputed to
AMEC defects or circumstances tending to cause it dishonor, discredit and
contempt. Rima and Alegres remarks such as "greed for money on the part of
AMECs administrators"; "AMEC is a dumping ground, garbage of xxx moral
and physical misfits"; and AMEC students who graduate "will be liabilities
rather than assets" of the society are libelous per se. Taken as a whole, the
broadcasts suggest that AMEC is a money-making institution where physically
and morally unfit teachers abound.

However, FBNI contends that the broadcasts are not malicious. FBNI claims
that Rima and Alegre were plainly impelled by their civic duty to air the
students gripes. FBNI alleges that there is no evidence that ill will or spite
motivated Rima and Alegre in making the broadcasts. FBNI further points out
that Rima and Alegre exerted efforts to obtain AMECs side and gave Ago the
opportunity to defend AMEC and its administrators. FBNI concludes that since
there is no malice, there is no libel.
FBNIs contentions are untenable.
25

Every defamatory imputation is presumed malicious. Rima and Alegre failed

to show adequately their good intention and justifiable motive in airing the
supposed gripes of the students. As hosts of a documentary or public affairs
program, Rima and Alegre should have presented the public issues "free from
26
inaccurate and misleading information."
Hearing the students alleged
27
complaints a month before the expos, they had sufficient time to verify their
sources and information. However, Rima and Alegre hardly made a thorough
investigation of the students alleged gripes. Neither did they inquire about nor
confirm the purported irregularities in AMEC from the Department of Education,
Culture and Sports. Alegre testified that he merely went to AMEC to verify his
report from an alleged AMEC official who refused to disclose any information.
Alegre simply relied on the words of the students "because they were many
28
and not because there is proof that what they are saying is true." This plainly
shows Rima and Alegres reckless disregard of whether their report was true or
not.
Contrary to FBNIs claim, the broadcasts were not "the result of straight
reporting." Significantly, some courts in the United States apply the privilege of
"neutral reportage" in libel cases involving matters of public interest or public
figures. Under this privilege, a republisher who accurately and disinterestedly
reports certain defamatory statements made against public figures is shielded
from liability, regardless of the republishers subjective awareness of the truth
29
or falsity of the accusation. Rima and Alegre cannot invoke the privilege of
neutral reportage because unfounded comments abound in the broadcasts.
Moreover, there is no existing controversy involving AMEC when the
broadcasts were made. The privilege of neutral reportage applies where the
defamed person is a public figure who is involved in an existing controversy,
30
and a party to that controversy makes the defamatory statement.
However, FBNI argues vigorously that malice in law does not apply to this
31
case. Citing Borjal v. Court of Appeals, FBNI contends that the broadcasts
"fall within the coverage of qualifiedly privileged communications" for being
commentaries on matters of public interest. Such being the case, AMEC
should prove malice in fact or actual malice. Since AMEC allegedly failed to
prove actual malice, there is no libel.

FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the

"doctrine of fair comment," thus:
[F]air commentaries on matters of public interest are privileged and constitute a
valid defense in an action for libel or slander. The doctrine of fair comment
means that while in general every discreditable imputation publicly made is
deemed false, because every man is presumed innocent until his guilt is
judicially proved, and every false imputation is deemed malicious,
nevertheless, when the discreditable imputation is directed against a public
person in his public capacity, it is not necessarily actionable. In order that
such discreditable imputation to a public official may be actionable, it
must either be a false allegation of fact or a comment based on a false
supposition. If the comment is an expression of opinion, based on
established facts, then it is immaterial that the opinion happens to be
32
mistaken, as long as it might reasonably be inferred from the facts.
(Emphasis supplied)
True, AMEC is a private learning institution whose business of educating
students is "genuinely imbued with public interest." The welfare of the youth in
general and AMECs students in particular is a matter which the public has the
right to know. Thus, similar to the newspaper articles in Borjal, the subject
broadcasts dealt with matters of public interest. However, unlike in Borjal, the
questioned broadcasts are not based on established facts. The record
supports the following findings of the trial court:
xxx Although defendants claim that they were motivated by consistent reports
of students and parents against plaintiff, yet, defendants have not presented in
court, nor even gave name of a single student who made the complaint to
them, much less present written complaint or petition to that effect. To accept
this defense of defendants is too dangerous because it could easily give
license to the media to malign people and establishments based on flimsy
excuses that there were reports to them although they could not satisfactorily
establish it. Such laxity would encourage careless and irresponsible
broadcasting which is inimical to public interests.
Secondly, there is reason to believe that defendant radio broadcasters,
contrary to the mandates of their duties, did not verify and analyze the truth of
the reports before they aired it, in order to prove that they are in good faith.
Alegre contended that plaintiff school had no permit and is not accredited to
offer Physical Therapy courses. Yet, plaintiff produced a certificate coming
from DECS that as of Sept. 22, 1987 or more than 2 years before the
controversial broadcast, accreditation to offer Physical Therapy course had
already been given the plaintiff, which certificate is signed by no less than the
Secretary of Education and Culture herself, Lourdes R. Quisumbing (Exh. Crebuttal). Defendants could have easily known this were they careful enough to
verify. And yet, defendants were very categorical and sounded too positive

when they made the erroneous report that plaintiff had no permit to offer
Physical Therapy courses which they were offering.

B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES

1. x x x

The allegation that plaintiff was getting tremendous aids from foreign
foundations like Mcdonald Foundation prove not to be true also. The truth is
there is no Mcdonald Foundation existing. Although a big building of plaintiff
school was given the name Mcdonald building, that was only in order to honor
the first missionary in Bicol of plaintiffs religion, as explained by Dr. Lita Ago.
Contrary to the claim of defendants over the air, not a single centavo appears
to be received by plaintiff school from the aforementioned McDonald
Foundation which does not exist.
Defendants did not even also bother to prove their claim, though denied by
Dra. Ago, that when medical students fail in one subject, they are made to
repeat all the other subject[s], even those they have already passed, nor their
claim that the school charges laboratory fees even if there are no laboratories
in the school. No evidence was presented to prove the bases for these claims,
at least in order to give semblance of good faith.
As for the allegation that plaintiff is the dumping ground for misfits, and immoral
teachers, defendant[s] singled out Dean Justita Lola who is said to be so old,
with zero visibility already. Dean Lola testified in court last Jan. 21, 1991, and
was found to be 75 years old. xxx Even older people prove to be effective
teachers like Supreme Court Justices who are still very much in demand as
law professors in their late years. Counsel for defendants is past 75 but is
found by this court to be still very sharp and effective.l^vvphi1.net So is
plaintiffs counsel.
Dr. Lola was observed by this court not to be physically decrepit yet, nor
mentally infirmed, but is still alert and docile.
The contention that plaintiffs graduates become liabilities rather than assets of
our society is a mere conclusion. Being from the place himself, this court is
aware that majority of the medical graduates of plaintiffs pass the board
33
examination easily and become prosperous and responsible professionals.
Had the comments been an expression of opinion based on established facts,
it is immaterial that the opinion happens to be mistaken, as long as it might
34
reasonably be inferred from the facts. However, the comments of Rima and
Alegre were not backed up by facts. Therefore, the broadcasts are not
privileged and remain libelous per se.

4. Public affairs program shall present public issues free from

personal bias, prejudice and inaccurate and misleading information.
x x x Furthermore, the station shall strive to present balanced
discussion of issues. x x x.
xxx
7. The station shall be responsible at all times in the supervision of
public affairs, public issues and commentary programs so that they
conform to the provisions and standards of this code.
8. It shall be the responsibility of the newscaster, commentator, host
and announcer to protect public interest, general welfare and good
36
order in the presentation of public affairs and public issues.
(Emphasis supplied)
The broadcasts fail to meet the standards prescribed in the Radio Code, which
lays down the code of ethical conduct governing practitioners in the radio
broadcast industry. The Radio Code is a voluntary code of conduct imposed by
the radio broadcast industry on its own members. The Radio Code is a public
warranty by the radio broadcast industry that radio broadcast practitioners are
subject to a code by which their conduct are measured for lapses, liability and
sanctions.
The public has a right to expect and demand that radio broadcast practitioners
live up to the code of conduct of their profession, just like other professionals.
A professional code of conduct provides the standards for determining whether
a person has acted justly, honestly and with good faith in the exercise of his
37
rights and performance of his duties as required by Article 19 of the Civil
Code. A professional code of conduct also provides the standards for
determining whether a person who willfully causes loss or injury to another has
38
acted in a manner contrary to morals or good customs under Article 21 of the
Civil Code.

35

The broadcasts also violate the Radio Code of the Kapisanan ng mga
Brodkaster sa Pilipinas, Ink. ("Radio Code"). Item I(B) of the Radio Code
provides:

II.
Whether AMEC is entitled to moral damages

FBNI contends that AMEC is not entitled to moral damages because it is a

39
corporation.
A juridical person is generally not entitled to moral damages because, unlike a
natural person, it cannot experience physical suffering or such sentiments as
40
wounded feelings, serious anxiety, mental anguish or moral shock. The Court
41
of Appeals cites Mambulao Lumber Co. v. PNB, et al. to justify the award of
moral damages. However, the Courts statement in Mambulao that "a
corporation may have a good reputation which, if besmirched, may also be a
42
ground for the award of moral damages" is an obiter dictum.
Nevertheless, AMECs claim for moral damages falls under item 7 of Article
43
2219 of the Civil Code. This provision expressly authorizes the recovery of
moral damages in cases of libel, slander or any other form of defamation.
Article 2219(7) does not qualify whether the plaintiff is a natural or juridical
person. Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for moral
44
damages.
45

Moreover, where the broadcast is libelous per se, the law implies damages.
In such a case, evidence of an honest mistake or the want of character or
46
reputation of the party libeled goes only in mitigation of damages. Neither in
such a case is the plaintiff required to introduce evidence of actual damages as
47
a condition precedent to the recovery of some damages. In this case, the
broadcasts are libelous per se. Thus, AMEC is entitled to moral damages.
However, we find the award of P300,000 moral damages unreasonable. The
record shows that even though the broadcasts were libelous per se, AMEC has
not suffered any substantial or material damage to its reputation. Therefore, we
reduce the award of moral damages from P300,000 to P150,000.
III.
Whether the award of attorneys fees is proper
FBNI contends that since AMEC is not entitled to moral damages, there is no
basis for the award of attorneys fees. FBNI adds that the instant case does not
48
fall under the enumeration in Article 2208 of the Civil Code.
The award of attorneys fees is not proper because AMEC failed to justify
satisfactorily its claim for attorneys fees. AMEC did not adduce evidence to
warrant the award of attorneys fees. Moreover, both the trial and appellate
courts failed to explicitly state in their respective decisions the rationale for the
49
award of attorneys fees. In Inter-Asia Investment Industries, Inc. v. Court
50
of Appeals , we held that:

[I]t is an accepted doctrine that the award thereof as an item of damages is the
exception rather than the rule, and counsels fees are not to be awarded every
time a party wins a suit. The power of the court to award attorneys fees
under Article 2208 of the Civil Code demands factual, legal and equitable
justification, without which the award is a conclusion without a premise,
its basis being improperly left to speculation and conjecture. In all events,
the court must explicitly state in the text of the decision, and not only in the
51
decretal portion thereof, the legal reason for the award of attorneys fees.
(Emphasis supplied)
While it mentioned about the award of attorneys fees by stating that it "lies
within the discretion of the court and depends upon the circumstances of each
case," the Court of Appeals failed to point out any circumstance to justify the
award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre for moral
damages, attorneys fees and costs of suit
FBNI contends that it is not solidarily liable with Rima and Alegre for the
payment of damages and attorneys fees because it exercised due diligence in
the selection and supervision of its employees, particularly Rima and Alegre.
FBNI maintains that its broadcasters, including Rima and Alegre, undergo a
"very regimented process" before they are allowed to go on air. "Those who
apply for broadcaster are subjected to interviews, examinations and an
apprenticeship program."
FBNI further argues that Alegres age and lack of training are irrelevant to his
competence as a broadcaster. FBNI points out that the "minor deficiencies in
the KBP accreditation of Rima and Alegre do not in any way prove that FBNI
did not exercise the diligence of a good father of a family in selecting and
supervising them." Rimas accreditation lapsed due to his non-payment of the
KBP annual fees while Alegres accreditation card was delayed allegedly for
reasons attributable to the KBP Manila Office. FBNI claims that membership in
the KBP is merely voluntary and not required by any law or government
regulation.
FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly and
52
severally liable for the tort which they commit. Joint tort feasors are all the
persons who command, instigate, promote, encourage, advise, countenance,
cooperate in, aid or abet the commission of a tort, or who approve of it after it
53
is done, if done for their benefit. Thus, AMEC correctly anchored its cause of
action against FBNI on Articles 2176 and 2180 of the Civil Code.1a\^/phi1.net

As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily

liable to pay for damages arising from the libelous broadcasts. As stated by the
Court of Appeals, "recovery for defamatory statements published by radio or
television may be had from the owner of the station, a licensee, the operator
of the station, or a person who procures, or participates in, the making of the
54
defamatory statements." An employer and employee are solidarily liable for a
defamatory statement by the employee within the course and scope of his or
her employment, at least when the employer authorizes or ratifies the
55
defamation. In this case, Rima and Alegre were clearly performing their
official duties as hosts of FBNIs radio program Expos when they aired the
broadcasts. FBNI neither alleged nor proved that Rima and Alegre went
beyond the scope of their work at that time. There was likewise no showing
that FBNI did not authorize and ratify the defamatory broadcasts.

Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-Santiago, and Azcuna, JJ.,

concur.

Moreover, there is insufficient evidence on record that FBNI exercised due

diligence in the selection and supervision of its employees, particularly Rima
and Alegre. FBNI merely showed that it exercised diligence in the selection of
its broadcasters without introducing any evidence to prove that it observed the
same diligence in the supervision of Rima and Alegre. FBNI did not show how
it exercised diligence in supervising its broadcasters. FBNIs alleged constant
reminder to its broadcasters to "observe truth, fairness and objectivity and to
refrain from using libelous and indecent language" is not enough to prove due
diligence in the supervision of its broadcasters. Adequate training of the
broadcasters on the industrys code of conduct, sufficient information on libel
laws, and continuous evaluation of the broadcasters performance are but a
few of the many ways of showing diligence in the supervision of broadcasters.
FBNI claims that it "has taken all the precaution in the selection of Rima and
Alegre as broadcasters, bearing in mind their qualifications." However, no clear
and convincing evidence shows that Rima and Alegre underwent FBNIs
"regimented process" of application. Furthermore, FBNI admits that Rima and
56
Alegre had deficiencies in their KBP accreditation, which is one of FBNIs
requirements before it hires a broadcaster. Significantly, membership in the
KBP, while voluntary, indicates the broadcasters strong commitment to
observe the broadcast industrys rules and regulations. Clearly, these
circumstances show FBNIs lack of diligence in selecting and supervising Rima
and Alegre. Hence, FBNI is solidarily liable to pay damages together with Rima
and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4
January 1999 and Resolution of 26 January 2000 of the Court of Appeals in
CA-G.R. CV No. 40151 with the MODIFICATION that the award of moral
damages is reduced from P300,000 to P150,000 and the award of attorneys
fees is deleted. Costs against petitioner.
SO ORDERED.
G.R. No. L-27155

May 18, 1978

PHILIPPINE NATIONAL BANK, petitioner,

vs.
THE COURT OF APPEALS, RITA GUECO TAPNIO, CECILIO GUECO and
THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC.,
respondents.
Medina, Locsin, Corua, & Sumbillo for petitioner.
Manuel Lim & Associates for private respondents.
ANTONIO, J.:
Certiorari to review the decision of the Court of Appeals which affirmed the
judgment of the Court of First Instance of Manila in Civil Case No. 34185,
ordering petitioner, as third-party defendant, to pay respondent Rita Gueco
Tapnio, as third-party plaintiff, the sum of P2,379.71, plus 12% interest per
annum from September 19, 1957 until the same is fully paid, P200.00
attorney's fees and costs, the same amounts which Rita Gueco Tapnio was
ordered to pay the Philippine American General Insurance Co., Inc., to be paid
directly to the Philippine American General Insurance Co., Inc. in full
satisfaction of the judgment rendered against Rita Gueco Tapnio in favor of the
former; plus P500.00 attorney's fees for Rita Gueco Tapnio and costs. The
basic action is the complaint filed by Philamgen (Philippine American General
Insurance Co., Inc.) as surety against Rita Gueco Tapnio and Cecilio Gueco,
for the recovery of the sum of P2,379.71 paid by Philamgen to the Philippine
National Bank on behalf of respondents Tapnio and Gueco, pursuant to an
indemnity agreement. Petitioner Bank was made third-party defendant by
Tapnio and Gueco on the theory that their failure to pay the debt was due to
the fault or negligence of petitioner.
The facts as found by the respondent Court of Appeals, in affirming the
decision of the Court of First Instance of Manila, are quoted hereunder:
Plaintiff executed its Bond, Exh. A, with defendant Rita Gueco
Tapnio as principal, in favor of the Philippine National Bank
Branch at San Fernando, Pampanga, to guarantee the
payment of defendant Rita Gueco Tapnio's account with said
Bank. In turn, to guarantee the payment of whatever amount
the bonding company would pay to the Philippine National
Bank, both defendants executed the indemnity agreement,
Exh. B. Under the terms and conditions of this indemnity
agreement, whatever amount the plaintiff would pay would
earn interest at the rate of 12% per annum, plus attorney's
fees in the amount of 15 % of the whole amount due in case of
court litigation.

The original amount of the bond was for P4,000.00; but the
amount was later reduced to P2,000.00.
It is not disputed that defendant Rita Gueco Tapnio was
indebted to the bank in the sum of P2,000.00, plus
accumulated interests unpaid, which she failed to pay despite
demands. The Bank wrote a letter of demand to plaintiff, as
per Exh. C; whereupon, plaintiff paid the bank on September
18, 1957, the full amount due and owing in the sum of
P2,379.91, for and on account of defendant Rita Gueco's
obligation (Exhs. D and D-1).
Plaintiff, in turn, made several demands, both verbal and
written, upon defendants (Exhs. E and F), but to no avail.
Defendant Rita Gueco Tapnio admitted all the foregoing facts.
She claims, however, when demand was made upon her by
plaintiff for her to pay her debt to the Bank, that she told the
Plaintiff that she did not consider herself to be indebted to the
Bank at all because she had an agreement with one JacoboNazon whereby she had leased to the latter her unused export
sugar quota for the 1956-1957 agricultural year, consisting of
1,000 piculs at the rate of P2.80 per picul, or for a total of
P2,800.00, which was already in excess of her obligation
guaranteed by plaintiff's bond, Exh. A. This lease agreement,
according to her, was with the knowledge of the bank. But the
Bank has placed obstacles to the consummation of the lease,
and the delay caused by said obstacles forced 'Nazon to
rescind the lease contract. Thus, Rita Gueco Tapnio filed her
third-party complaint against the Bank to recover from the
latter any and all sums of money which may be adjudged
against her and in favor of the plaitiff plus moral damages,
attorney's fees and costs.
Insofar as the contentions of the parties herein are concerned,
we quote with approval the following findings of the lower court
based on the evidence presented at the trial of the case:
It has been established during the trial that
Mrs. Tapnio had an export sugar quota of
1,000 piculs for the agricultural year 19561957 which she did not need. She agreed to
allow Mr. Jacobo C. Tuazon to use said quota
for the consideration of P2,500.00 (Exh. "4"Gueco). This agreement was called a contract
of lease of sugar allotment.

At the time of the agreement, Mrs. Tapnio was

indebted to the Philippine National Bank at
San Fernando, Pampanga. Her indebtedness
was known as a crop loan and was secured
by a mortgage on her standing crop including
her sugar quota allocation for the agricultural
year corresponding to said standing crop. This
arrangement was necessary in order that
when Mrs. Tapnio harvests, the P.N.B., having
a lien on the crop, may effectively enforce
collection against her. Her sugar cannot be
exported without sugar quota allotment
Sometimes, however, a planter harvest less
sugar than her quota, so her excess quota is
utilized by another who pays her for its use.
This is the arrangement entered into between
Mrs. Tapnio and Mr. Tuazon regarding the
former's excess quota for 1956-1957 (Exh.
"4"-Gueco).
Since the quota was mortgaged to the P.N.B.,
the contract of lease had to be approved by
said Bank, The same was submitted to the
branch
manager
at
San
Fernando,
Pampanga. The latter required the parties to
raise the consideration of P2.80 per picul or a
total of P2,800.00 (Exh. "2-Gueco") informing
them that "the minimum lease rental
acceptable to the Bank, is P2.80 per picul." In
a letter addressed to the branch manager on
August 10, 1956, Mr. Tuazon informed the
manager that he was agreeable to raising the
consideration to P2.80 per picul. He further
informed the manager that he was ready to
pay said amount as the funds were in his
folder which was kept in the bank.
Explaining the meaning of Tuazon's statement
as to the funds, it was stated by him that he
had an approved loan from the bank but he
had not yet utilized it as he was intending to
use it to pay for the quota. Hence, when he
said the amount needed to pay Mrs. Tapnio
was in his folder which was in the bank, he
meant and the manager understood and knew
he had an approved loan available to be used
in payment of the quota. In said Exh. "6-

Gueco", Tuazon also informed the manager

that he would want for a notice from the
manager as to the time when the bank needed
the money so that Tuazon could sign the
corresponding promissory note.
Further Consideration of the evidence discloses that when the
branch manager of the Philippine National Bank at San
Fernando recommended the approval of the contract of lease
at the price of P2.80 per picul (Exh. 1 1-Bank), whose
recommendation was concurred in by the Vice-president of
said Bank, J. V. Buenaventura, the board of directors required
that the amount be raised to 13.00 per picul. This act of the
board of directors was communicated to Tuazon, who in turn
asked for a reconsideration thereof. On November 19, 1956,
the branch manager submitted Tuazon's request for
reconsideration to the board of directors with another
recommendation for the approval of the lease at P2.80 per
picul, but the board returned the recommendation unacted
upon, considering that the current price prevailing at the time
was P3.00 per picul (Exh. 9-Bank).
The parties were notified of the refusal on the part of the board
of directors of the Bank to grant the motion for reconsideration.
The matter stood as it was until February 22, 1957, when
Tuazon wrote a letter (Exh. 10-Bank informing the Bank that
he was no longer interested to continue the deal, referring to
the lease of sugar quota allotment in favor of defendant Rita
Gueco Tapnio. The result is that the latter lost the sum of
P2,800.00 which she should have received from Tuazon and
which she could have paid the Bank to cancel off her
indebtedness,
The court below held, and in this holding we concur that failure
of the negotiation for the lease of the sugar quota allocation of
Rita Gueco Tapnio to Tuazon was due to the fault of the
directors of the Philippine National Bank, The refusal on the
part of the bank to approve the lease at the rate of P2.80 per
picul which, as stated above, would have enabled Rita Gueco
Tapnio to realize the amount of P2,800.00 which was more
than sufficient to pay off her indebtedness to the Bank, and its
insistence on the rental price of P3.00 per picul thus
unnecessarily increasing the value by only a difference of
P200.00. inevitably brought about the rescission of the lease
contract to the damage and prejudice of Rita Gueco Tapnio in
the aforesaid sum of P2,800.00. The unreasonableness of the
position adopted by the board of directors of the Philippine

National Bank in refusing to approve the lease at the rate of

P2.80 per picul and insisting on the rate of P3.00 per picul, if
only to increase the retail value by only P200.00 is shown by
the fact that all the accounts of Rita Gueco Tapnio with the
Bank were secured by chattel mortgage on standing crops,
assignment of leasehold rights and interests on her properties,
and surety bonds, aside from the fact that from Exh. 8-Bank, it
appears that she was offering to execute a real estate
mortgage in favor of the Bank to replace the surety bond This
statement is further bolstered by the fact that Rita Gueco
Tapnio apparently had the means to pay her obligation fact
that she has been granted several value of almost P80,000.00
1
for the agricultural years from 1952 to 56.
Its motion for the reconsideration of the decision of the Court of Appeals having
been denied, petitioner filed the present petition.
The petitioner contends that the Court of Appeals erred:
(1) In finding that the rescission of the lease contract of the 1,000 piculs of
sugar quota allocation of respondent Rita Gueco Tapnio by Jacobo C. Tuazon
was due to the unjustified refusal of petitioner to approve said lease contract,
and its unreasonable insistence on the rental price of P3.00 instead of P2.80
per picul; and
(2) In not holding that based on the statistics of sugar price and prices of sugar
quota in the possession of the petitioner, the latter's Board of Directors
correctly fixed the rental of price per picul of 1,000 piculs of sugar quota leased
by respondent Rita Gueco Tapnio to Jacobo C. Tuazon at P3.00 per picul.
Petitioner argued that as an assignee of the sugar quota of Tapnio, it has the
right, both under its own Charter and under the Corporation Law, to safeguard
and protect its rights and interests under the deed of assignment, which
include the right to approve or disapprove the said lease of sugar quota and in
the exercise of that authority, its
Board of Directors necessarily had authority to determine and fix the rental
price per picul of the sugar quota subject of the lease between private
respondents and Jacobo C. Tuazon. It argued further that both under its
Charter and the Corporation Law, petitioner, acting thru its Board of Directors,
has the perfect right to adopt a policy with respect to fixing of rental prices of
export sugar quota allocations, and in fixing the rentals at P3.00 per picul, it did
not act arbitrarily since the said Board was guided by statistics of sugar price
and prices of sugar quotas prevailing at the time. Since the fixing of the rental
of the sugar quota is a function lodged with petitioner's Board of Directors and
is a matter of policy, the respondent Court of Appeals could not substitute its

own judgment for that of said Board of Directors, which acted in good faith,
making as its basis therefore the prevailing market price as shown by statistics
which were then in their possession.
Finally, petitioner emphasized that under the appealed judgment, it shall suffer
a great injustice because as a creditor, it shall be deprived of a just claim
against its debtor (respondent Rita Gueco Tapnio) as it would be required to
return to respondent Philamgen the sum of P2,379.71, plus interest, which
amount had been previously paid to petitioner by said insurance company in
behalf of the principal debtor, herein respondent Rita Gueco Tapnio, and
without recourse against respondent Rita Gueco Tapnio.
We must advert to the rule that this Court's appellate jurisdiction in proceedings
of this nature is limited to reviewing only errors of law, accepting as conclusive
the factual fin dings of the Court of Appeals upon its own assessment of the
2
evidence.
The contract of lease of sugar quota allotment at P2.50 per picul between Rita
Gueco Tapnio and Jacobo C. Tuazon was executed on April 17, 1956. This
contract was submitted to the Branch Manager of the Philippine National Bank
at San Fernando, Pampanga. This arrangement was necessary because
Tapnio's indebtedness to petitioner was secured by a mortgage on her
standing crop including her sugar quota allocation for the agricultural year
corresponding to said standing crop. The latter required the parties to raise the
consideration to P2.80 per picul, the minimum lease rental acceptable to the
Bank, or a total of P2,800.00. Tuazon informed the Branch Manager, thru a
letter dated August 10, 1956, that he was agreeable to raising the
consideration to P2.80 per picul. He further informed the manager that he was
ready to pay the said sum of P2,800.00 as the funds were in his folder which
was kept in the said Bank. This referred to the approved loan of Tuazon from
the Bank which he intended to use in paying for the use of the sugar quota.
The Branch Manager submitted the contract of lease of sugar quota allocation
to the Head Office on September 7, 1956, with a recommendation for approval,
which recommendation was concurred in by the Vice-President of the Bank,
Mr. J. V. Buenaventura. This notwithstanding, the Board of Directors of
petitioner required that the consideration be raised to P3.00 per picul.
Tuazon, after being informed of the action of the Board of Directors, asked for
a reconsideration thereof. On November 19, 1956, the Branch Manager
submitted the request for reconsideration and again recommended the
approval of the lease at P2.80 per picul, but the Board returned the
recommendation unacted, stating that the current price prevailing at that time
was P3.00 per picul.
On February 22, 1957, Tuazon wrote a letter, informing the Bank that he was
no longer interested in continuing the lease of sugar quota allotment. The crop
year 1956-1957 ended and Mrs. Tapnio failed to utilize her sugar quota,

resulting in her loss in the sum of P2,800.00 which she should have received
had the lease in favor of Tuazon been implemented.
It has been clearly shown that when the Branch Manager of petitioner required
the parties to raise the consideration of the lease from P2.50 to P2.80 per
picul, or a total of P2,800-00, they readily agreed. Hence, in his letter to the
Branch Manager of the Bank on August 10, 1956, Tuazon informed him that
the minimum lease rental of P2.80 per picul was acceptable to him and that he
even offered to use the loan secured by him from petitioner to pay in full the
sum of P2,800.00 which was the total consideration of the lease. This
arrangement was not only satisfactory to the Branch Manager but it was also
approves by Vice-President J. V. Buenaventura of the PNB. Under that
arrangement, Rita Gueco Tapnio could have realized the amount of P2,800.00,
which was more than enough to pay the balance of her indebtedness to the
Bank which was secured by the bond of Philamgen.
There is no question that Tapnio's failure to utilize her sugar quota for the crop
year 1956-1957 was due to the disapproval of the lease by the Board of
Directors of petitioner. The issue, therefore, is whether or not petitioner is liable
for the damage caused.
As observed by the trial court, time is of the essence in the approval of the
lease of sugar quota allotments, since the same must be utilized during the
milling season, because any allotment which is not filled during such milling
season may be reallocated by the Sugar Quota Administration to other holders
3
of allotments. There was no proof that there was any other person at that time
willing to lease the sugar quota allotment of private respondents for a price
higher than P2.80 per picul. "The fact that there were isolated transactions
wherein the consideration for the lease was P3.00 a picul", according to the
trial court, "does not necessarily mean that there are always ready takers of
said price. " The unreasonableness of the position adopted by the petitioner's
Board of Directors is shown by the fact that the difference between the amount
of P2.80 per picul offered by Tuazon and the P3.00 per picul demanded by the
Board amounted only to a total sum of P200.00. Considering that all the
accounts of Rita Gueco Tapnio with the Bank were secured by chattel
mortgage on standing crops, assignment of leasehold rights and interests on
her properties, and surety bonds and that she had apparently "the means to
pay her obligation to the Bank, as shown by the fact that she has been granted
several sugar crop loans of the total value of almost P80,000.00 for the
agricultural years from 1952 to 1956", there was no reasonable basis for the
Board of Directors of petitioner to have rejected the lease agreement because
of a measly sum of P200.00.
While petitioner had the ultimate authority of approving or disapproving the
proposed lease since the quota was mortgaged to the Bank, the latter certainly
cannot escape its responsibility of observing, for the protection of the interest
of private respondents, that degree of care, precaution and vigilance which the

circumstances justly demand in approving or disapproving the lease of said

sugar quota. The law makes it imperative that every person "must in the
exercise of his rights and in the performance of his duties, act with justice, give
4
everyone his due, and observe honesty and good faith, This petitioner failed
to do. Certainly, it knew that the agricultural year was about to expire, that by
its disapproval of the lease private respondents would be unable to utilize the
sugar quota in question. In failing to observe the reasonable degree of care
and vigilance which the surrounding circumstances reasonably impose,
petitioner is consequently liable for the damages caused on private
respondents. Under Article 21 of the New Civil Code, "any person who wilfully
causes loss or injury to another in a manner that is contrary to morals, good
customs or public policy shall compensate the latter for the damage." The
afore-cited provisions on human relations were intended to expand the concept
of torts in this jurisdiction by granting adequate legal remedy for the untold
number of moral wrongs which is impossible for human foresight to specifically
5
provide in the statutes.
A corporation is civilly liable in the same manner as natural persons for torts,
because "generally speaking, the rules governing the liability of a principal or
master for a tort committed by an agent or servant are the same whether the
principal or master be a natural person or a corporation, and whether the
servant or agent be a natural or artificial person. All of the authorities agree
that a principal or master is liable for every tort which he expressly directs or
authorizes, and this is just as true of a corporation as of a natural person, A
corporation is liable, therefore, whenever a tortious act is committed by an
officer or agent under express direction or authority from the stockholders or
members acting as a body, or, generally, from the directors as the governing
6
body."
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is
hereby AFFIRMED.
Fernando, Aquino, Concepcion, Jr., and Santos, JJ., concur.

dated March 17, 1993 of the Regional Trial Court (RTC), Branch 96, Quezon
City in Civil Case No. Q-43322 and nullifying its Order dated September 21,
1993.
The facts, as culled from the records, are:
G.R. No. 126297

January 31, 2007

PROFESSIONAL SERVICES, INC., Petitioner,

vs.
NATIVIDAD and ENRIQUE AGANA, Respondents.
x-----------------------x
G.R. No. 126467

January 31, 2007

NATIVIDAD (Substituted by her children MARCELINO AGANA III,

ENRIQUE AGANA, JR., EMMA AGANA ANDAYA, JESUS AGANA, and
RAYMUND AGANA) and ENRIQUE AGANA, Petitioners,
vs.
JUAN FUENTES, Respondent.
x- - - - - - - - - - - - - - - - - - - -- - - - x
G.R. No. 127590

January 31, 2007

MIGUEL AMPIL, Petitioner,

vs.
NATIVIDAD AGANA and ENRIQUE AGANA, Respondents.
DECISION
SANDOVAL-GUTIERREZ, J.:
Hospitals, having undertaken one of mankinds most important and delicate
endeavors, must assume the grave responsibility of pursuing it with
appropriate care. The care and service dispensed through this high trust,
however technical, complex and esoteric its character may be, must meet
standards of responsibility commensurate with the undertaking to preserve and
protect the health, and indeed, the very lives of those placed in the hospitals
1
keeping.
Assailed in these three consolidated petitions for review on certiorari is the
2
Court of Appeals Decision dated September 6, 1996 in CA-G.R. CV No.
3
42062 and CA-G.R. SP No. 32198 affirming with modification the Decision

On April 4, 1984, Natividad Agana was rushed to the Medical City General
Hospital (Medical City Hospital) because of difficulty of bowel movement and
bloody anal discharge. After a series of medical examinations, Dr. Miguel
Ampil, petitioner in G.R. No. 127590, diagnosed her to be suffering from
"cancer of the sigmoid."
4

On April 11, 1984, Dr. Ampil, assisted by the medical staff of the Medical City
Hospital, performed an anterior resection surgery on Natividad. He found that
the malignancy in her sigmoid area had spread on her left ovary, necessitating
the removal of certain portions of it. Thus, Dr. Ampil obtained the consent of
Natividads husband, Enrique Agana, to permit Dr. Juan Fuentes, respondent
in G.R. No. 126467, to perform hysterectomy on her.
After Dr. Fuentes had completed the hysterectomy, Dr. Ampil took over,
completed the operation and closed the incision.
However, the operation appeared to be flawed. In the corresponding Record of
Operation dated April 11, 1984, the attending nurses entered these remarks:
"sponge count lacking 2
"announced to surgeon searched (sic) done but to no avail continue for
closure."
On April 24, 1984, Natividad was released from the hospital. Her hospital and
medical bills, including the doctors fees, amounted to P60,000.00.
After a couple of days, Natividad complained of excruciating pain in her anal
region. She consulted both Dr. Ampil and Dr. Fuentes about it. They told her
that the pain was the natural consequence of the surgery. Dr. Ampil then
recommended that she consult an oncologist to examine the cancerous nodes
which were not removed during the operation.
On May 9, 1984, Natividad, accompanied by her husband, went to the United
States to seek further treatment. After four months of consultations and
laboratory examinations, Natividad was told she was free of cancer. Hence,
she was advised to return to the Philippines.

On August 31, 1984, Natividad flew back to the Philippines, still suffering from
pains. Two weeks thereafter, her daughter found a piece of gauze protruding
from her vagina. Upon being informed about it, Dr. Ampil proceeded to her
house where he managed to extract by hand a piece of gauze measuring 1.5
inches in width. He then assured her that the pains would soon vanish.

reimbursement of actual expenses incurred in the United

States of America;

Dr. Ampils assurance did not come true. Instead, the pains intensified,
prompting Natividad to seek treatment at the Polymedic General Hospital.
While confined there, Dr. Ramon Gutierrez detected the presence of another
foreign object in her vagina -- a foul-smelling gauze measuring 1.5 inches in
width which badly infected her vaginal vault. A recto-vaginal fistula had formed
in her reproductive organs which forced stool to excrete through the vagina.
Another surgical operation was needed to remedy the damage. Thus, in
October 1984, Natividad underwent another surgery.

c. The total sum of P45,802.50, representing the cost of

hospitalization at Polymedic Hospital, medical fees, and cost of
the saline solution;

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

b. The sum of P4,800.00 as travel taxes of plaintiffs and their

physician daughter;

2. As moral damages, the sum of P2,000,000.00;

3. As exemplary damages, the sum of P300,000.00;
4. As attorneys fees, the sum of P250,000.00;
5. Legal interest on items 1 (a), (b), and (c); 2; and 3 hereinabove,
from date of filing of the complaint until full payment; and
6. Costs of suit.
SO ORDERED.
Aggrieved, PSI, Dr. Fuentes and Dr. Ampil interposed an appeal to the Court of
Appeals, docketed as CA-G.R. CV No. 42062.
Incidentally, on April 3, 1993, the Aganas filed with the RTC a motion for a
partial execution of its Decision, which was granted in an Order dated May 11,
1993. Thereafter, the sheriff levied upon certain properties of Dr. Ampil and
sold them for P451,275.00 and delivered the amount to the Aganas.
Following their receipt of the money, the Aganas entered into an agreement
with PSI and Dr. Fuentes to indefinitely suspend any further execution of the
RTC Decision. However, not long thereafter, the Aganas again filed a motion
for an alias writ of execution against the properties of PSI and Dr. Fuentes. On
September 21, 1993, the RTC granted the motion and issued the
corresponding writ, prompting Dr. Fuentes to file with the Court of Appeals a
petition for certiorari and prohibition, with prayer for preliminary injunction,
docketed as CA-G.R. SP No. 32198. During its pendency, the Court of Appeals
5
issued a Resolution dated October 29, 1993 granting Dr. Fuentes prayer for
injunctive relief.

1. As actual damages, the following amounts:

a. The equivalent in Philippine Currency of the total of
US$19,900.00 at the rate of P21.60-US$1.00, as

On January 24, 1994, CA-G.R. SP No. 32198 was consolidated with CA-G.R.
CV No. 42062.

Meanwhile, on January 23, 1995, the PRC Board of Medicine rendered its
6
Decision in Administrative Case No. 1690 dismissing the case against Dr.
Fuentes. The Board held that the prosecution failed to show that Dr. Fuentes
was the one who left the two pieces of gauze inside Natividads body; and that
he concealed such fact from Natividad.
On September 6, 1996, the Court of Appeals rendered its Decision jointly
disposing of CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198, thus:
WHEREFORE, except for the modification that the case against defendantappellant Dr. Juan Fuentes is hereby DISMISSED, and with the
pronouncement that defendant-appellant Dr. Miguel Ampil is liable to
reimburse defendant-appellant Professional Services, Inc., whatever amount
the latter will pay or had paid to the plaintiffs-appellees, the decision appealed
from is hereby AFFIRMED and the instant appeal DISMISSED.
Concomitant with the above, the petition for certiorari and prohibition filed by
herein defendant-appellant Dr. Juan Fuentes in CA-G.R. SP No. 32198 is
hereby GRANTED and the challenged order of the respondent judge dated
September 21, 1993, as well as the alias writ of execution issued pursuant
thereto are hereby NULLIFIED and SET ASIDE. The bond posted by the
petitioner in connection with the writ of preliminary injunction issued by this
Court on November 29, 1993 is hereby cancelled.
Costs against defendants-appellants Dr. Miguel Ampil and Professional
Services, Inc.
SO ORDERED.
Only Dr. Ampil filed a motion for reconsideration, but it was denied in a
7
Resolution dated December 19, 1996.
Hence, the instant consolidated petitions.

Finally, in G.R. No. 127590, Dr. Ampil asserts that the Court of Appeals erred
in finding him liable for negligence and malpractice sans evidence that he left
the two pieces of gauze in Natividads vagina. He pointed to other probable
causes, such as: (1) it was Dr. Fuentes who used gauzes in performing the
hysterectomy; (2) the attending nurses failure to properly count the gauzes
used during surgery; and (3) the medical intervention of the American doctors
who examined Natividad in the United States of America.
For our resolution are these three vital issues: first, whether the Court of
Appeals erred in holding Dr. Ampil liable for negligence and malpractice;
second, whether the Court of Appeals erred in absolving Dr. Fuentes of any
liability; and third, whether PSI may be held solidarily liable for the negligence
of Dr. Ampil.
I - G.R. No. 127590
Whether the Court of Appeals Erred in Holding Dr. Ampil
Liable for Negligence and Malpractice.
Dr. Ampil, in an attempt to absolve himself, gears the Courts attention to other
possible causes of Natividads detriment. He argues that the Court should not
discount either of the following possibilities: first, Dr. Fuentes left the gauzes in
Natividads body after performing hysterectomy; second, the attending nurses
erred in counting the gauzes; and third, the American doctors were the ones
who placed the gauzes in Natividads body.
Dr. Ampils arguments are purely conjectural and without basis. Records show
that he did not present any evidence to prove that the American doctors were
the ones who put or left the gauzes in Natividads body. Neither did he submit
evidence to rebut the correctness of the record of operation, particularly the
number of gauzes used. As to the alleged negligence of Dr. Fuentes, we are
mindful that Dr. Ampil examined his (Dr. Fuentes) work and found it in order.

In G.R. No. 126297, PSI alleged in its petition that the Court of Appeals erred
in holding that: (1) it is estopped from raising the defense that Dr. Ampil is not
its employee; (2) it is solidarily liable with Dr. Ampil; and (3) it is not entitled to
its counterclaim against the Aganas. PSI contends that Dr. Ampil is not its
employee, but a mere consultant or independent contractor. As such, he alone
should answer for his negligence.

The glaring truth is that all the major circumstances, taken together, as
specified by the Court of Appeals, directly point to Dr. Ampil as the negligent
party, thus:

In G.R. No. 126467, the Aganas maintain that the Court of Appeals erred in
finding that Dr. Fuentes is not guilty of negligence or medical malpractice,
invoking the doctrine of res ipsa loquitur. They contend that the pieces of
gauze are prima facie proofs that the operating surgeons have been negligent.

Second, immediately after the operation, the nurses who assisted in

the surgery noted in their report that the sponge count (was) lacking
2; that such anomaly was announced to surgeon and that a search
was done but to no avail prompting Dr. Ampil to continue for closure
x x x.

First, it is not disputed that the surgeons used gauzes as sponges to

control the bleeding of the patient during the surgical operation.

Third, after the operation, two (2) gauzes were extracted from the
same spot of the body of Mrs. Agana where the surgery was
performed.
An operation requiring the placing of sponges in the incision is not complete
until the sponges are properly removed, and it is settled that the leaving of
sponges or other foreign substances in the wound after the incision has been
8
closed is at least prima facie negligence by the operating surgeon. To put it
simply, such act is considered so inconsistent with due care as to raise an
inference of negligence. There are even legions of authorities to the effect that
9
such act is negligence per se.
Of course, the Court is not blind to the reality that there are times when danger
to a patients life precludes a surgeon from further searching missing sponges
or foreign objects left in the body. But this does not leave him free from any
obligation. Even if it has been shown that a surgeon was required by the urgent
necessities of the case to leave a sponge in his patients abdomen, because of
the dangers attendant upon delay, still, it is his legal duty to so inform his
patient within a reasonable time thereafter by advising her of what he had been
compelled to do. This is in order that she might seek relief from the effects of
the foreign object left in her body as her condition might permit. The ruling in
10
Smith v. Zeagler is explicit, thus:
The removal of all sponges used is part of a surgical operation, and when a
physician or surgeon fails to remove a sponge he has placed in his patients
body that should be removed as part of the operation, he thereby leaves his
operation uncompleted and creates a new condition which imposes upon him
the legal duty of calling the new condition to his patients attention, and
endeavoring with the means he has at hand to minimize and avoid untoward
results likely to ensue therefrom.
Here, Dr. Ampil did not inform Natividad about the missing two pieces of
gauze. Worse, he even misled her that the pain she was experiencing was the
ordinary consequence of her operation. Had he been more candid, Natividad
could have taken the immediate and appropriate medical remedy to remove
the gauzes from her body. To our mind, what was initially an act of negligence
by Dr. Ampil has ripened into a deliberate wrongful act of deceiving his patient.
This is a clear case of medical malpractice or more appropriately, medical
negligence. To successfully pursue this kind of case, a patient must only prove
that a health care provider either failed to do something which a reasonably
prudent health care provider would have done, or that he did something that a
reasonably prudent provider would not have done; and that failure or action
11
caused injury to the patient. Simply put, the elements are duty, breach, injury
and proximate causation. Dr, Ampil, as the lead surgeon, had the duty to
remove all foreign objects, such as gauzes, from Natividads body before
closure of the incision. When he failed to do so, it was his duty to inform

Natividad about it. Dr. Ampil breached both duties. Such breach caused injury
to Natividad, necessitating her further examination by American doctors and
12
another surgery. That Dr. Ampils negligence is the proximate cause of
Natividads injury could be traced from his act of closing the incision despite
the information given by the attending nurses that two pieces of gauze were
still missing. That they were later on extracted from Natividads vagina
established the causal link between Dr. Ampils negligence and the injury. And
what further aggravated such injury was his deliberate concealment of the
missing gauzes from the knowledge of Natividad and her family.
II - G.R. No. 126467
Whether the Court of Appeals Erred in Absolving
Dr. Fuentes of any Liability
The Aganas assailed the dismissal by the trial court of the case against Dr.
Fuentes on the ground that it is contrary to the doctrine of res ipsa loquitur.
According to them, the fact that the two pieces of gauze were left inside
Natividads body is a prima facie evidence of Dr. Fuentes negligence.
We are not convinced.
Literally, res ipsa loquitur means "the thing speaks for itself." It is the rule that
the fact of the occurrence of an injury, taken with the surrounding
circumstances, may permit an inference or raise a presumption of negligence,
or make out a plaintiffs prima facie case, and present a question of fact for
13
defendant to meet with an explanation. Stated differently, where the thing
which caused the injury, without the fault of the injured, is under the exclusive
control of the defendant and the injury is such that it should not have occurred
if he, having such control used proper care, it affords reasonable evidence, in
the absence of explanation that the injury arose from the defendants want of
care, and the burden of proof is shifted to him to establish that he has
14
observed due care and diligence.
From the foregoing statements of the rule, the requisites for the applicability of
the doctrine of res ipsa loquitur are: (1) the occurrence of an injury; (2) the
thing which caused the injury was under the control and management of the
defendant; (3) the occurrence was such that in the ordinary course of things,
would not have happened if those who had control or management used
proper care; and (4) the absence of explanation by the defendant. Of the
foregoing requisites, the most instrumental is the "control and management of
15
the thing which caused the injury."
We find the element of "control and management of the thing which caused the
injury" to be wanting. Hence, the doctrine of res ipsa loquitur will not lie.

It was duly established that Dr. Ampil was the lead surgeon during the
operation of Natividad. He requested the assistance of Dr. Fuentes only to
perform hysterectomy when he (Dr. Ampil) found that the malignancy in her
sigmoid area had spread to her left ovary. Dr. Fuentes performed the surgery
and thereafter reported and showed his work to Dr. Ampil. The latter examined
it and finding everything to be in order, allowed Dr. Fuentes to leave the
operating room. Dr. Ampil then resumed operating on Natividad. He was about
to finish the procedure when the attending nurses informed him that two pieces
of gauze were missing. A "diligent search" was conducted, but the misplaced
gauzes were not found. Dr. Ampil then directed that the incision be closed.
During this entire period, Dr. Fuentes was no longer in the operating room and
had, in fact, left the hospital.
Under the "Captain of the Ship" rule, the operating surgeon is the person in
complete charge of the surgery room and all personnel connected with the
16
operation. Their duty is to obey his orders. As stated before, Dr. Ampil was
the lead surgeon. In other words, he was the "Captain of the Ship." That he
discharged such role is evident from his following conduct: (1) calling Dr.
Fuentes to perform a hysterectomy; (2) examining the work of Dr. Fuentes and
finding it in order; (3) granting Dr. Fuentes permission to leave; and (4)
ordering the closure of the incision. To our mind, it was this act of ordering the
closure of the incision notwithstanding that two pieces of gauze remained
unaccounted for, that caused injury to Natividads body. Clearly, the control
and management of the thing which caused the injury was in the hands of Dr.
Ampil, not Dr. Fuentes.

continues to distance itself from its charitable past and has experienced a
significant conversion from a not-for-profit health care to for-profit hospital
businesses. Consequently, significant changes in health law have
accompanied the business-related changes in the hospital industry. One
important legal change is an increase in hospital liability for medical
malpractice. Many courts now allow claims for hospital vicarious liability under
the theories of respondeat superior, apparent authority, ostensible authority, or
20
agency by estoppel.
In this jurisdiction, the statute governing liability for negligent acts is Article
2176 of the Civil Code, which reads:
Art. 2176. Whoever by act or omission causes damage to another, there being
fault or negligence, is obliged to pay for the damage done. Such fault or
negligence, if there is no pre-existing contractual relation between the parties,
is called a quasi-delict and is governed by the provisions of this Chapter.
A derivative of this provision is Article 2180, the rule governing vicarious
liability under the doctrine of respondeat superior, thus:
ART. 2180. The obligation imposed by Article 2176 is demandable not only for
ones own acts or omissions, but also for those of persons for whom one is
responsible.
x x x

In this jurisdiction, res ipsa loquitur is not a rule of substantive law, hence, does
not per se create or constitute an independent or separate ground of liability,
17
being a mere evidentiary rule.
In other words, mere invocation and
application of the doctrine does not dispense with the requirement of proof of
negligence. Here, the negligence was proven to have been committed by Dr.
Ampil and not by Dr. Fuentes.
III - G.R. No. 126297
Whether PSI Is Liable for the Negligence of Dr. Ampil

x x x

The owners and managers of an establishment or enterprise are likewise

responsible for damages caused by their employees in the service of the
branches in which the latter are employed or on the occasion of their functions.
Employers shall be liable for the damages caused by their employees and
household helpers acting within the scope of their assigned tasks even though
the former are not engaged in any business or industry.
x x x

The third issue necessitates a glimpse at the historical development of

hospitals and the resulting theories concerning their liability for the negligence
of physicians.

The responsibility treated of in this article shall cease when the persons herein
mentioned prove that they observed all the diligence of a good father of a
family to prevent damage.

Until the mid-nineteenth century, hospitals were generally charitable

institutions, providing medical services to the lowest classes of society, without
18
regard for a patients ability to pay. Those who could afford medical treatment
19
were usually treated at home by their doctors. However, the days of house
calls and philanthropic health care are over. The modern health care industry

A prominent civilist commented that professionals engaged by an employer,

such as physicians, dentists, and pharmacists, are not "employees" under this
article because the manner in which they perform their work is not within the
control of the latter (employer). In other words, professionals are considered
personally liable for the fault or negligence they commit in the discharge of
their duties, and their employer cannot be held liable for such fault or

negligence. In the context of the present case, "a hospital cannot be held liable
for the fault or negligence of a physician or surgeon in the treatment or
21
operation of patients."
The foregoing view is grounded on the traditional notion that the professional
status and the very nature of the physicians calling preclude him from being
classed as an agent or employee of a hospital, whenever he acts in a
22
professional capacity. It has been said that medical practice strictly involves
23
highly developed and specialized knowledge, such that physicians are
generally free to exercise their own skill and judgment in rendering medical
24
services sans interference. Hence, when a doctor practices medicine in a
hospital setting, the hospital and its employees are deemed to subserve him in
25
his ministrations to the patient and his actions are of his own responsibility.
26

The case of Schloendorff v. Society of New York Hospital was then

considered an authority for this view. The "Schloendorff doctrine" regards a
physician, even if employed by a hospital, as an independent contractor
because of the skill he exercises and the lack of control exerted over his work.
Under this doctrine, hospitals are exempt from the application of the
respondeat superior principle for fault or negligence committed by physicians in
the discharge of their profession.
However, the efficacy of the foregoing doctrine has weakened with the
significant developments in medical care. Courts came to realize that modern
hospitals are increasingly taking active role in supplying and regulating medical
care to patients. No longer were a hospitals functions limited to furnishing
room, food, facilities for treatment and operation, and attendants for its
27
patients. Thus, in Bing v. Thunig, the New York Court of Appeals deviated
from the Schloendorff doctrine, noting that modern hospitals actually do far
more than provide facilities for treatment. Rather, they regularly employ, on a
salaried basis, a large staff of physicians, interns, nurses, administrative and
manual workers. They charge patients for medical care and treatment, even
collecting for such services through legal action, if necessary. The court then
concluded that there is no reason to exempt hospitals from the universal rule of
respondeat superior.
In our shores, the nature of the relationship between the hospital and the
physicians is rendered inconsequential in view of our categorical
28
pronouncement in Ramos v. Court of Appeals
that for purposes of
apportioning responsibility in medical negligence cases, an employeremployee relationship in effect exists between hospitals and their attending
and visiting physicians. This Court held:

presents problems in apportioning responsibility for negligence in medical

malpractice cases. However, the difficulty is more apparent than real.
In the first place, hospitals exercise significant control in the hiring and firing of
consultants and in the conduct of their work within the hospital premises.
Doctors who apply for consultant slots, visiting or attending, are required to
submit proof of completion of residency, their educational qualifications,
generally, evidence of accreditation by the appropriate board (diplomate),
evidence of fellowship in most cases, and references. These requirements are
carefully scrutinized by members of the hospital administration or by a review
committee set up by the hospital who either accept or reject the application. x x
x.
After a physician is accepted, either as a visiting or attending consultant, he is
normally required to attend clinico-pathological conferences, conduct bedside
rounds for clerks, interns and residents, moderate grand rounds and patient
audits and perform other tasks and responsibilities, for the privilege of being
able to maintain a clinic in the hospital, and/or for the privilege of admitting
patients into the hospital. In addition to these, the physicians performance as a
specialist is generally evaluated by a peer review committee on the basis of
mortality and morbidity statistics, and feedback from patients, nurses, interns
and residents. A consultant remiss in his duties, or a consultant who regularly
falls short of the minimum standards acceptable to the hospital or its peer
review committee, is normally politely terminated.
In other words, private hospitals, hire, fire and exercise real control over their
attending and visiting consultant staff. While consultants are not, technically
employees, x x x, the control exercised, the hiring, and the right to terminate
consultants all fulfill the important hallmarks of an employer-employee
relationship, with the exception of the payment of wages. In assessing whether
such a relationship in fact exists, the control test is determining. Accordingly,
on the basis of the foregoing, we rule that for the purpose of allocating
responsibility in medical negligence cases, an employer-employee relationship
in effect exists between hospitals and their attending and visiting physicians. "
But the Ramos pronouncement is not our only basis in sustaining PSIs liability.
Its liability is also anchored upon the agency principle of apparent authority or
agency by estoppel and the doctrine of corporate negligence which have
gained acceptance in the determination of a hospitals liability for negligent acts
of health professionals. The present case serves as a perfect platform to test
the applicability of these doctrines, thus, enriching our jurisprudence.
Apparent authority, or what is sometimes referred to as the "holding

"We now discuss the responsibility of the hospital in this particular incident.
The unique practice (among private hospitals) of filling up specialist staff with
attending and visiting "consultants," who are allegedly not hospital employees,

29

out" theory, or doctrine of ostensible agency or agency by estoppel, has its

origin from the law of agency. It imposes liability, not as the result of the reality

of a contractual relationship, but rather because of the actions of a principal or

an employer in somehow misleading the public into believing that the
30
relationship or the authority exists. The concept is essentially one of estoppel
and has been explained in this manner:
"The principal is bound by the acts of his agent with the apparent authority
which he knowingly permits the agent to assume, or which he holds the agent
out to the public as possessing. The question in every case is whether the
principal has by his voluntary act placed the agent in such a situation that a
person of ordinary prudence, conversant with business usages and the nature
of the particular business, is justified in presuming that such agent has
31
authority to perform the particular act in question.
The applicability of apparent authority in the field of hospital liability was upheld
32
long time ago in Irving v. Doctor Hospital of Lake Worth, Inc. There, it was
explicitly stated that "there does not appear to be any rational basis for
excluding the concept of apparent authority from the field of hospital liability."
Thus, in cases where it can be shown that a hospital, by its actions, has held
out a particular physician as its agent and/or employee and that a patient has
accepted treatment from that physician in the reasonable belief that it is being
rendered in behalf of the hospital, then the hospital will be liable for the
physicians negligence.
Our jurisdiction recognizes the concept of an agency by implication or
estoppel. Article 1869 of the Civil Code reads:
ART. 1869. Agency may be express, or implied from the acts of the principal,
from his silence or lack of action, or his failure to repudiate the agency,
knowing that another person is acting on his behalf without authority.
In this case, PSI publicly displays in the lobby of the Medical City Hospital the
names and specializations of the physicians associated or accredited by it,
including those of Dr. Ampil and Dr. Fuentes. We concur with the Court of
Appeals conclusion that it "is now estopped from passing all the blame to the
physicians whose names it proudly paraded in the public directory leading the
public to believe that it vouched for their skill and competence." Indeed, PSIs
act is tantamount to holding out to the public that Medical City Hospital,
through its accredited physicians, offers quality health care services. By
accrediting Dr. Ampil and Dr. Fuentes and publicly advertising their
qualifications, the hospital created the impression that they were its agents,
authorized to perform medical or surgical services for its patients. As expected,
these patients, Natividad being one of them, accepted the services on the
reasonable belief that such were being rendered by the hospital or its
employees, agents, or servants. The trial court correctly pointed out:

x x x regardless of the education and status in life of the patient, he ought not
be burdened with the defense of absence of employer-employee relationship
between the hospital and the independent physician whose name and
competence are certainly certified to the general public by the hospitals act of
listing him and his specialty in its lobby directory, as in the case herein. The
high costs of todays medical and health care should at least exact on the
hospital greater, if not broader, legal responsibility for the conduct of treatment
and surgery within its facility by its accredited physician or surgeon, regardless
33
of whether he is independent or employed."
The wisdom of the foregoing ratiocination is easy to discern. Corporate entities,
like PSI, are capable of acting only through other individuals, such as
physicians. If these accredited physicians do their job well, the hospital
succeeds in its mission of offering quality medical services and thus profits
financially. Logically, where negligence mars the quality of its services, the
hospital should not be allowed to escape liability for the acts of its ostensible
agents.
We now proceed to the doctrine of corporate negligence or corporate
responsibility.
One allegation in the complaint in Civil Case No. Q-43332 for negligence and
malpractice is that PSI as owner, operator and manager of Medical City
Hospital, "did not perform the necessary supervision nor exercise diligent
efforts in the supervision of Drs. Ampil and Fuentes and its nursing staff,
resident doctors, and medical interns who assisted Drs. Ampil and Fuentes in
34
the performance of their duties as surgeons." Premised on the doctrine of
corporate negligence, the trial court held that PSI is directly liable for such
breach of duty.
We agree with the trial court.
Recent years have seen the doctrine of corporate negligence as the judicial
answer to the problem of allocating hospitals liability for the negligent acts of
health practitioners, absent facts to support the application of respondeat
superior or apparent authority. Its formulation proceeds from the judiciarys
acknowledgment that in these modern times, the duty of providing quality
medical service is no longer the sole prerogative and responsibility of the
physician. The modern hospitals have changed structure. Hospitals now tend
to organize a highly professional medical staff whose competence and
performance need to be monitored by the hospitals commensurate with their
35
inherent responsibility to provide quality medical care.
36

The doctrine has its genesis in Darling v. Charleston Community Hospital.

There, the Supreme Court of Illinois held that "the jury could have found a
hospital negligent, inter alia, in failing to have a sufficient number of trained

nurses attending the patient; failing to require a consultation with or

examination by members of the hospital staff; and failing to review the
treatment rendered to the patient." On the basis of Darling, other jurisdictions
held that a hospitals corporate negligence extends to permitting a physician
37
known to be incompetent to practice at the hospital. With the passage of
time, more duties were expected from hospitals, among them: (1) the use of
reasonable care in the maintenance of safe and adequate facilities and
equipment; (2) the selection and retention of competent physicians; (3) the
overseeing or supervision of all persons who practice medicine within its walls;
and (4) the formulation, adoption and enforcement of adequate rules and
38
policies that ensure quality care for its patients. Thus, in Tucson Medical
39
Center, Inc. v. Misevich, it was held that a hospital, following the doctrine of
corporate responsibility, has the duty to see that it meets the standards of
responsibilities for the care of patients. Such duty includes the proper
40
supervision of the members of its medical staff. And in Bost v. Riley, the court
concluded that a patient who enters a hospital does so with the reasonable
expectation that it will attempt to cure him. The hospital accordingly has the
duty to make a reasonable effort to monitor and oversee the treatment
prescribed and administered by the physicians practicing in its premises.
In the present case, it was duly established that PSI operates the Medical City
Hospital for the purpose and under the concept of providing comprehensive
medical services to the public. Accordingly, it has the duty to exercise
reasonable care to protect from harm all patients admitted into its facility for
medical treatment. Unfortunately, PSI failed to perform such duty. The findings
of the trial court are convincing, thus:
x x x PSIs liability is traceable to its failure to conduct an investigation of the
matter reported in the nota bene of the count nurse. Such failure established
PSIs part in the dark conspiracy of silence and concealment about the gauzes.
Ethical considerations, if not also legal, dictated the holding of an immediate
inquiry into the events, if not for the benefit of the patient to whom the duty is
primarily owed, then in the interest of arriving at the truth. The Court cannot
accept that the medical and the healing professions, through their members
like defendant surgeons, and their institutions like PSIs hospital facility, can
callously turn their backs on and disregard even a mere probability of mistake
or negligence by refusing or failing to investigate a report of such seriousness
as the one in Natividads case.
It is worthy to note that Dr. Ampil and Dr. Fuentes operated on Natividad with
the assistance of the Medical City Hospitals staff, composed of resident
doctors, nurses, and interns. As such, it is reasonable to conclude that PSI, as
the operator of the hospital, has actual or constructive knowledge of the
procedures carried out, particularly the report of the attending nurses that the
41
two pieces of gauze were missing. In Fridena v. Evans, it was held that a
corporation is bound by the knowledge acquired by or notice given to its agents
or officers within the scope of their authority and in reference to a matter to

which their authority extends. This means that the knowledge of any of the staff
of Medical City Hospital constitutes knowledge of PSI. Now, the failure of PSI,
despite the attending nurses report, to investigate and inform Natividad
regarding the missing gauzes amounts to callous negligence. Not only did PSI
breach its duties to oversee or supervise all persons who practice medicine
within its walls, it also failed to take an active step in fixing the negligence
committed. This renders PSI, not only vicariously liable for the negligence of
Dr. Ampil under Article 2180 of the Civil Code, but also directly liable for its
own negligence under Article 2176. In Fridena, the Supreme Court of Arizona
held:
x x x In recent years, however, the duty of care owed to the patient by the
hospital has expanded. The emerging trend is to hold the hospital responsible
where the hospital has failed to monitor and review medical services being
provided within its walls. See Kahn Hospital Malpractice Prevention, 27 De
Paul . Rev. 23 (1977).
Among the cases indicative of the emerging trend is Purcell v. Zimbelman, 18
Ariz. App. 75,500 P. 2d 335 (1972). In Purcell, the hospital argued that it could
not be held liable for the malpractice of a medical practitioner because he was
an independent contractor within the hospital. The Court of Appeals pointed
out that the hospital had created a professional staff whose competence and
performance was to be monitored and reviewed by the governing body of the
hospital, and the court held that a hospital would be negligent where it had
knowledge or reason to believe that a doctor using the facilities was employing
a method of treatment or care which fell below the recognized standard of
care.
Subsequent to the Purcell decision, the Arizona Court of Appeals held that a
hospital has certain inherent responsibilities regarding the quality of medical
care furnished to patients within its walls and it must meet the standards of
responsibility commensurate with this undertaking. Beeck v. Tucson General
Hospital, 18 Ariz. App. 165, 500 P. 2d 1153 (1972). This court has confirmed
the rulings of the Court of Appeals that a hospital has the duty of supervising
the competence of the doctors on its staff. x x x.
x

In the amended complaint, the plaintiffs did plead that the operation was
performed at the hospital with its knowledge, aid, and assistance, and that the
negligence of the defendants was the proximate cause of the patients injuries.
We find that such general allegations of negligence, along with the evidence
produced at the trial of this case, are sufficient to support the hospitals liability
based on the theory of negligent supervision."

Anent the corollary issue of whether PSI is solidarily liable with Dr. Ampil for
damages, let it be emphasized that PSI, apart from a general denial of its
responsibility, failed to adduce evidence showing that it exercised the diligence
of a good father of a family in the accreditation and supervision of the latter. In
neglecting to offer such proof, PSI failed to discharge its burden under the last
paragraph of Article 2180 cited earlier, and, therefore, must be adjudged
solidarily liable with Dr. Ampil. Moreover, as we have discussed, PSI is also
directly liable to the Aganas.

No. 99-93173, entitled Romeo M. Morales, doing business under the name and
style RM Morales Trophies and Plaques v. Kukan, Inc. In the said orders, the
RTC disregarded the separate corporate identities of Kukan, Inc. and Kukan
International Corporation and declared them to be one and the same entity.
Accordingly, the RTC held Kukan International Corporation, albeit not
impleaded in the underlying complaint of Romeo M. Morales, liable for the
5
judgment award decreed in a Decision dated November 28, 2002 in favor of
Morales and against Kukan, Inc.

One final word. Once a physician undertakes the treatment and care of a
patient, the law imposes on him certain obligations. In order to escape liability,
he must possess that reasonable degree of learning, skill and experience
required by his profession. At the same time, he must apply reasonable care
and diligence in the exercise of his skill and the application of his knowledge,
and exert his best judgment.

The Facts

WHEREFORE, we DENY all the petitions and AFFIRM the challenged

Decision of the Court of Appeals in CA-G.R. CV No. 42062 and CA-G.R. SP
No. 32198.
Costs against petitioners PSI and Dr. Miguel Ampil.
SO ORDERED.
G.R. No. 182729

Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and
installation of signages in a building being constructed in Makati City. Morales
tendered the winning bid and was awarded the PhP 5 million contract. Some of
the items in the project award were later excluded resulting in the
corresponding reduction of the contract price to PhP 3,388,502. Despite his
compliance with his contractual undertakings, Morales was only paid the
amount of PhP 1,976,371.07, leaving a balance of PhP 1,412,130.93, which
Kukan, Inc. refused to pay despite demands. Shortchanged, Morales filed a
6
Complaint with the RTC against Kukan, Inc. for a sum of money, the case
docketed as Civil Case No. 99-93173 and eventually raffled to Branch 17 of the
court.
Following the joinder of issues after Kukan, Inc. filed an answer with
counterclaim, trial ensued. However, starting November 2000, Kukan, Inc. no
longer appeared and participated in the proceedings before the trial court,
prompting the RTC to declare Kukan, Inc. in default and paving the way for
Morales to present his evidence ex parte.

September 29, 2010

KUKAN INTERNATIONAL CORPORATION, Petitioner,

vs.
HON. AMOR REYES, in her capacity as Presiding Judge of the Regional
Trial Court of Manila, Branch 21, and ROMEO M. MORALES, doing
business under the name and style "RM Morales Trophies and Plaques,"
Respondents.

On November 28, 2002, the RTC rendered a Decision finding for Morales and
against Kukan, Inc., disposing as follows:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil
Procedure, and by preponderance of evidence, judgment is hereby rendered in
favor of the plaintiff, ordering Kukan, Inc.:

DECISION
VELASCO, JR., J.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE

THOUSAND SEVEN HUNDRED TWENTY FOUR PESOS
(P1,201,724.00) with legal interest at 12% per annum from February
17, 1999 until full payment;

The Case
This Petition for Review on Certiorari under Rule 45 seeks to nullify and
1
2
reverse the January 23, 2008 Decision and the April 16, 2008 Resolution
rendered by the Court of Appeals (CA) in CA-G.R. SP No. 100152.
3

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as

moral damages;

The assailed CA decision affirmed the March 12, 2007 and June 7, 2007
Orders of the Regional Trial Court (RTC) of Manila, Branch 21, in Civil Case

3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as

reasonable attorneys fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY

PESOS and SIX CENTAVOS (P7,960.06) as litigation expenses.
For lack of factual foundation, the counterclaim is DISMISSED.
IT IS SO ORDERED.

After the above decision became final and executory, Morales moved for and
8
secured a writ of execution against Kukan, Inc. The sheriff then levied upon
various personal properties found at what was supposed to be Kukan, Inc.s
office at Unit 2205, 88 Corporate Center, Salcedo Village, Makati City. Alleging
that it owned the properties thus levied and that it was a different corporation
from Kukan, Inc., Kukan International Corporation (KIC) filed an Affidavit of
Third-Party Claim. Notably, KIC was incorporated in August 2000, or shortly
after Kukan, Inc. had stopped participating in Civil Case No. 99-93173.
In reaction to the third party claim, Morales interposed an Omnibus Motion
dated April 30, 2003. In it, Morales prayed, applying the principle of piercing
the veil of corporate fiction, that an order be issued for the satisfaction of the
judgment debt of Kukan, Inc. with the properties under the name or in the
possession of KIC, it being alleged that both corporations are but one and the
9
same entity. KIC opposed Morales motion. By Order of May 29, 2003 as
reiterated in a subsequent order, the court denied the omnibus motion.
In a bid to establish the link between KIC and Kukan, Inc., and thus determine
the true relationship between the two, Morales filed a Motion for Examination of
Judgment Debtors dated May 4, 2005. In this motion Morales sought that
subponae be issued against the primary stockholders of Kukan, Inc., among
them Michael Chan, a.k.a. Chan Kai Kit. This too was denied by the trial court
10
in an Order dated May 24, 2005.
Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta,
Jr., who eventually granted the motion. The case was re-raffled to Branch 21,
presided by public respondent Judge Amor Reyes.
Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of
Corporate Fiction to declare KIC as having no existence separate from Kukan,
Inc. This time around, the RTC, by Order dated March 12, 2007, granted the
motion, the dispositive portion of which reads:
WHEREFORE, premises considered, the motion is hereby GRANTED. The
Court hereby declares as follows:
1. defendant Kukan, Inc. and newly created Kukan International Corp.
as one and the same corporation;

2. the levy made on the properties of Kukan International Corp. is

hereby valid;
3. Kukan International Corp. and Michael Chan are jointly and
severally liable to pay the amount awarded to plaintiff pursuant to the
decision of November [28], 2002 which has long been final and
executory.
SO ORDERED.
From the above order, KIC moved but was denied reconsideration in another
Order dated June 7, 2007.
KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12
and June 7, 2007 RTC Orders.
On January 23, 2008, the CA rendered the assailed decision, the dispositive
portion of which states:
WHEREFORE, premises considered, the petition is hereby DENIED and the
assailed Orders dated March 12, 2007 and June 7, 2007 of the court a quo are
both AFFIRMED. No costs.
SO ORDERED.

11

The CA later denied KICs motion for reconsideration in the assailed resolution.
Hence, the instant petition for review, with the following issues KIC raises for
the Courts consideration:
1. There is no legal basis for the [CA] to resolve and declare that
petitioners Constitutional Right to Due Process was not violated by the
public respondent in rendering the Orders dated March 12, 2007 and
June 7, 2007 and in declaring petitioner to be liable for the judgment
obligations of the corporation "Kukan, Inc." to private respondent as
petitioner is a stranger to the case and was never made a party in the
case before the trial court nor was it ever served a summons and a
copy of the complaint.
2. There is no legal basis for the [CA] to resolve and declare that the
Orders dated March 12, 2007 and June 7, 2007 rendered by public
respondent declaring the petitioner liable to the judgment obligations of
the corporation "Kukan, Inc." to private respondent are valid as said
orders of the public respondent modify and/or amend the trial courts
final and executory decision rendered on November 28, 2002.

3. There is no legal basis for the [CA] to resolve and declare that the
Orders dated March 12, 2007 and June 7, 2007 rendered by public
respondent declaring the petitioner [KIC] and the corporation "Kukan,
Inc." as one and the same, and, therefore, the Veil of Corporate Fiction
between them be pierced as the procedure undertaken by public
respondent which the [CA] upheld is not sanctioned by the Rules of
Court and/or established jurisprudence enunciated by this Honorable
12
Supreme Court.
In gist, the issues to be resolved boil down to the question of, first, whether the
trial court can, after the judgment against Kukan, Inc. has attained finality,
execute it against the property of KIC; second, whether the trial court acquired
jurisdiction over KIC; and third, whether the trial and appellate courts correctly
applied, under the premises, the principle of piercing the veil of corporate
fiction.
The Ruling of the Court

recognized exceptions, among which is the correction of clerical errors. Else,

the court violates the principle of finality of judgment and its immutability,
15
concepts which the Court, in Tan v. Timbal, defined:
As we held in Industrial Management International Development Corporation
vs. NLRC:
It is an elementary principle of procedure that the resolution of the court in a
given issue as embodied in the dispositive part of a decision or order is the
controlling factor as to settlement of rights of the parties. Once a decision or
order becomes final and executory, it is removed from the power or jurisdiction
of the court which rendered it to further alter or amend it. It thereby becomes
immutable and unalterable and any amendment or alteration which
substantially affects a final and executory judgment is null and void for lack of
jurisdiction, including the entire proceedings held for that purpose. An order of
execution which varies the tenor of the judgment or exceeds the terms thereof
is a nullity. (Emphasis supplied.)
16

The petition is meritorious.

Republic v. Tango expounded on the same principle and its exceptions:

First Issue: Against Whom Can a Final and

Executory Judgment Be Executed
The preliminary question that must be answered is whether or not the trial
court can, after adjudging Kukan, Inc. liable for a sum of money in a final and
executory judgment, execute such judgment debt against the property of KIC.
The poser must be answered in the negative.
13

In Carpio v. Doroja, the Court ruled that the deciding court has supervisory
control over the execution of its judgment:
A case in which an execution has been issued is regarded as still pending so
that all proceedings on the execution are proceedings in the suit. There is no
question that the court which rendered the judgment has a general supervisory
control over its process of execution, and this power carries with it the right to
determine every question of fact and law which may be involved in the
execution.

Deeply ingrained in our jurisprudence is the principle that a decision that has
acquired finality becomes immutable and unalterable. As such, it may no
longer be modified in any respect even if the modification is meant to correct
erroneous conclusions of fact or law and whether it will be made by the court
that rendered it or by the highest court of the land. x x x
The doctrine of finality of judgment is grounded on the fundamental principle of
public policy and sound practice that, at the risk of occasional error, the
judgment of courts and the award of quasi-judicial agencies must become final
on some definite date fixed by law. The only exceptions to the general rule
are the correction of clerical errors, the so-called nunc pro tunc entries which
cause no prejudice to any party, void judgments, and whenever circumstances
transpire after the finality of the decision which render its execution unjust and
inequitable. None of the exceptions obtains here to merit the review sought.
(Emphasis added.)
So, did the RTC, in breach of the doctrine of immutability and inalterability of
judgment, order the execution of its final decision in a manner as would
amount to its prohibited alteration or modification?

14

We reiterated the above holding in Javier v. Court of Appeals in this wise:

"The said branch has a general supervisory control over its processes in the
execution of its judgment with a right to determine every question of fact and
law which may be involved in the execution."
The courts supervisory control does not, however, extend as to authorize the
alteration or amendment of a final and executory decision, save for certain

We repair to the dispositive portion of the final and executory RTC decision.
Pertinently, it provides:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil
Procedure, and by preponderance of evidence, judgment is hereby rendered in
favor of the plaintiff, ordering Kukan, Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE

THOUSAND SEVEN HUNDRED TWENTY FOUR PESOS
(P1,201,724.00) with legal interest at 12% per annum from February
17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as
moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as
reasonable attorneys fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY
PESOS and SIX CENTAVOS (P7,960.06) as litigation expenses.
x x x x (Emphasis supplied.)
As may be noted, the above decision, in unequivocal terms, directed Kukan,
Inc. to pay the aforementioned awards to Morales. Thus, making KIC, thru the
medium of a writ of execution, answerable for the above judgment liability is a
clear case of altering a decision, an instance of granting relief not
contemplated in the decision sought to be executed. And the change does not
fall under any of the recognized exceptions to the doctrine of finality and
immutability of judgment. It is a settled rule that a writ of execution must
conform to the fallo of the judgment; as an inevitable corollary, a writ beyond
17
the terms of the judgment is a nullity.
Thus, on this ground alone, the instant petition can already be granted.
Nonetheless, an examination of the other issues raised by KIC would be
proper.
Second Issue: Propriety of the RTC
Assuming Jurisdiction over KIC
The next issue turns on the validity of the execution the trial court authorized
against KIC and its property, given that it was neither made a party nor
impleaded in Civil Case No. 99-93173, let alone served with summons. In other
words, did the trial court acquire jurisdiction over KIC?
In the assailed decision, the appellate court deemed KIC to have voluntarily
submitted itself to the jurisdiction of the trial court owing to its filing of four (4)
18
pleadings adverted to earlier, namely: (a) the Affidavit of Third-Party Claim;
19
(b) the Comment and Opposition to Plaintiffs Omnibus Motion; (c) the Motion
20
for Reconsideration of the RTC Order dated March 12, 2007; and (d) the
21
Motion for Leave to Admit Reply. The CA, citing Section 20, Rule 14 of the
Rules of Court, stated that "the procedural rule on service of summons can be

waived by voluntary submission to the courts jurisdiction through any form of

22
appearance by the party or its counsel."
We cannot give imprimatur to the appellate courts appreciation of the thrust of
Sec. 20, Rule 14 of the Rules in concluding that the trial court acquired
jurisdiction over KIC.
Orion Security Corporation v. Kalfam Enterprises, Inc.
acquire jurisdiction over the parties in a civil case:

23

explains how courts

Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint.
On the other hand, jurisdiction over the defendants in a civil case is acquired
either through the service of summons upon them or through their voluntary
appearance in court and their submission to its authority. (Emphasis supplied.)
24

In the fairly recent Palma v. Galvez, the Court reiterated its holding in Orion
Security Corporation, stating: "[I]n civil cases, the trial court acquires
jurisdiction over the person of the defendant either by the service of summons
or by the latters voluntary appearance and submission to the authority of the
former."
The courts jurisdiction over a party-defendant resulting from his voluntary
submission to its authority is provided under Sec. 20, Rule 14 of the Rules,
which states:
Section 20. Voluntary appearance. The defendants voluntary appearance in
the actions shall be equivalent to service of summons. The inclusion in a
motion to dismiss of other grounds aside from lack of jurisdiction over the
person of the defendant shall not be deemed a voluntary appearance.
To be sure, the CAs ruling that any form of appearance by the party or its
counsel is deemed as voluntary appearance finds support in the kindred
25
26
Republic v. Ker & Co., Ltd. and De Midgely v. Ferandos.
Republic and De Midgely, however, have already been modified if not
27
28
altogether superseded by La Naval Drug Corporation v. Court of Appeals,
wherein the Court essentially ruled and elucidated on the current view in our
jurisdiction, to wit: "[A] special appearance before the courtchallenging its
jurisdiction over the person through a motion to dismiss even if the movant
invokes other groundsis not tantamount to estoppel or a waiver by the
movant of his objection to jurisdiction over his person; and such is not
29
constitutive of a voluntary submission to the jurisdiction of the court."
In the instant case, KIC was not made a party-defendant in Civil Case No. 9993173. Even if it is conceded that it raised affirmative defenses through its
aforementioned pleadings, KIC never abandoned its challenge, however

implicit, to the RTCs jurisdiction over its person. The challenge was subsumed
in KICs primary assertion that it was not the same entity as Kukan, Inc.
Pertinently, in its Comment and Opposition to Plaintiffs Omnibus Motion dated
May 20, 2003, KIC entered its "special but not voluntary appearance"
alleging therein that it was a different entity and has a separate legal
personality from Kukan, Inc. And KIC would consistently reiterate this assertion
in all its pleadings, thus effectively resisting all along the RTCs jurisdiction of
its person. It cannot be overemphasized that KIC could not file before the RTC
a motion to dismiss and its attachments in Civil Case No. 99-93173, precisely
because KIC was neither impleaded nor served with summons. Consequently,
KIC could only assert and claim through its affidavits, comments, and motions
filed by special appearance before the RTC that it is separate and distinct from
Kukan, Inc.
30

Following La Naval Drug Corporation, KIC cannot be deemed to have waived

its objection to the courts lack of jurisdiction over its person. It would defy logic
to say that KIC unequivocally submitted itself to the jurisdiction of the RTC
when it strongly asserted that it and Kukan, Inc. are different entities. In the
scheme of things obtaining, KIC had no other option but to insist on its
separate identity and plead for relief consistent with that position.

Whether the separate personality of the corporation should be pierced

hinges on obtaining facts appropriately pleaded or proved. However, any
piercing of the corporate veil has to be done with caution, albeit the Court will
not hesitate to disregard the corporate veil when it is misused or when
necessary in the interest of justice. x x x (Emphasis supplied.)
The same principle was the subject and discussed in Rivera v. United
Laboratories, Inc.:
While a corporation may exist for any lawful purpose, the law will regard it as
an association of persons or, in case of two corporations, merge them into one,
when its corporate legal entity is used as a cloak for fraud or illegality. This is
the doctrine of piercing the veil of corporate fiction. The doctrine applies only
when such corporate fiction is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, or when it is made as a shield to confuse the
legitimate issues, or where a corporation is the mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.

Third Issue: Piercing the

Veil of Corporate Fiction

To disregard the separate juridical personality of a corporation, the wrongdoing

33
must be established clearly and convincingly. It cannot be presumed.
(Emphasis supplied.)

The third and main issue in this case is whether or not the trial and appellate
courts correctly applied the principle of piercing the veil of corporate entity
called also as disregarding the fiction of a separate juridical personality of a
corporationto support a conclusion that Kukan, Inc. and KIC are but one and
the same corporation with respect to the contract award referred to at the
outset. This principle finds its context on the postulate that a corporation is an
artificial being invested with a personality separate and distinct from those of
the stockholders and from other corporations to which it may be connected or
31
related.

Now, as before the appellate court, petitioner KIC maintains that the RTC
violated its right to due process when, in the execution of its November 28,
2002 Decision, the court authorized the issuance of the writ against KIC for
Kukan, Inc.s judgment debt, albeit KIC has never been a party to the
underlying suit. As a counterpoint, Morales argues that KICs specific concern
on due process and on the validity of the writ to execute the RTCs November
28, 2002 Decision would be mooted if it were established that KIC and Kukan,
Inc. are indeed one and the same corporation.

In Pantranco Employees Association (PEA-PTGWO) v. National Labor

32
Relations Commission, the Court revisited the subject principle of piercing the
veil of corporate fiction and wrote:
Under the doctrine of "piercing the veil of corporate fiction," the court looks at
the corporation as a mere collection of individuals or an aggregation of persons
undertaking business as a group, disregarding the separate juridical
personality of the corporation unifying the group. Another formulation of this
doctrine is that when two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary to
protect the rights of third parties, disregard the legal fiction that two
corporations are distinct entities and treat them as identical or as one and the
same.

Morales contention is untenable.

The principle of piercing the veil of corporate fiction, and the resulting treatment
of two related corporations as one and the same juridical person with respect
to a given transaction, is basically applied only to determine established
34
liability; it is not available to confer on the court a jurisdiction it has not
acquired, in the first place, over a party not impleaded in a case. Elsewise put,
a corporation not impleaded in a suit cannot be subject to the courts process
of piercing the veil of its corporate fiction. In that situation, the court has not
acquired jurisdiction over the corporation and, hence, any proceedings taken
against that corporation and its property would infringe on its right to due
process. Aguedo Agbayani, a recognized authority on Commercial Law, stated
as much:

36

23. Piercing the veil of corporate entity applies to determination of liability not
of jurisdiction. x x x

Statutes governing motions are given a liberal construction.

supplied.)

This is so because the doctrine of piercing the veil of corporate fiction comes to
play only during the trial of the case after the court has already acquired
jurisdiction over the corporation. Hence, before this doctrine can be applied,
based on the evidence presented, it is imperative that the court must first have
35
jurisdiction over the corporation. x x x (Emphasis supplied.)

The bottom line issue of whether Morales can proceed against KIC for the
judgment debt of Kukan, Inc.assuming hypothetically that he can, applying
the piercing the corporate veil principleresolves itself into the question of
whether a mere motion is the appropriate vehicle for such purpose.

The implication of the above comment is twofold: (1) the court must first
acquire jurisdiction over the corporation or corporations involved before its or
their separate personalities are disregarded; and (2) the doctrine of piercing
the veil of corporate entity can only be raised during a full-blown trial over a
cause of action duly commenced involving parties duly brought under the
authority of the court by way of service of summons or what passes as such
service.
The issue of jurisdiction or the lack of it over KIC has already been discussed.
Anent the matter of the time and manner of raising the principle in question, it
is undisputed that no full-blown trial involving KIC was had when the RTC
disregarded the corporate veil of KIC. The reason for this actuality is simple
and undisputed: KIC was not impleaded in Civil Case No. 99-93173 and that
the RTC did not acquire jurisdiction over it. It was dragged to the case after it
reacted to the improper execution of its properties and veritably hauled to
court, not thru the usual process of service of summons, but by mere motion of
a party with whom it has no privity of contract and after the decision in the main
case had already become final and executory. As to the propriety of a plea for
the application of the principle by mere motion, the following excerpts are
instructive:
Generally, a motion is appropriate only in the absence of remedies by regular
pleadings, and is not available to settle important questions of law, or to
dispose of the merits of the case. A motion is usually a proceeding incidental to
an action, but it may be a wholly distinct or independent proceeding. A motion
in this sense is not within this discussion even though the relief demanded is
denominated an "order."
A motion generally relates to procedure and is often resorted to in order to
correct errors which have crept in along the line of the principal actions
progress. Generally, where there is a procedural defect in a proceeding and no
method under statute or rule of court by which it may be called to the attention
of the court, a motion is an appropriate remedy. In many jurisdictions, the
motion has replaced the common-law pleas testing the sufficiency of the
pleadings, and various common-law writs, such as writ of error coram nobis
and audita querela. In some cases, a motion may be one of several remedies
available. For example, in some jurisdictions, a motion to vacate an order is a
remedy alternative to an appeal therefrom.

(Emphasis

Verily, Morales espouses the application of the principle of piercing the

corporate veil to hold KIC liable on theory that Kukan, Inc. was out to defraud
him through the use of the separate and distinct personality of another
corporation, KIC. In net effect, Morales adverted motion to pierce the veil of
corporate fiction dated January 3, 2007 stated a new cause of action, i.e., for
the liability of judgment debtor Kukan, Inc. to be borne by KIC on the alleged
identity of the two corporations. This new cause of action should be properly
ventilated in another complaint and subsequent trial where the doctrine of
piercing the corporate veil can, if appropriate, be applied, based on the
evidence adduced. Establishing the claim of Morales and the corresponding
liability of KIC for Kukan Inc.s indebtedness could hardly be the subject, under
the premises, of a mere motion interposed after the principal action against
Kukan, Inc. alone had peremptorily been terminated. After all, a complaint is
one where the plaintiff alleges causes of action.
In any event, the principle of piercing the veil of corporate fiction finds no
application to the instant case.
As a general rule, courts should be wary of lifting the corporate veil between
corporations, however related. Philippine National Bank v. Andrada Electric
37
Engineering Company explains why:
A corporation is an artificial being created by operation of law. x x x 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. This is basic.
Equally well-settled is the principle that the corporate mask may be removed or
the corporate veil pierced when the corporation is just an alter ego of a person
or of another corporation. For reasons of public policy and in the interest of
justice, the corporate veil will justifiably be impaled only when it becomes a
shield for fraud, illegality or inequity committed against third persons.
Hence, any application of the doctrine of piercing the corporate veil should be
done with caution. A court should be mindful of the milieu where it is to be
applied. 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. The wrongdoing must be clearly and convincingly

established; it cannot be presumed. Otherwise, an injustice that was never

unintended may result from an erroneous application.
This Court has pierced the corporate veil to ward off a judgment credit, to avoid
inclusion of corporate assets as part of the estate of the decedent, to escape
liability arising from a debt, or to perpetuate fraud and/or confuse legitimate
issues either to promote or to shield unfair objectives or to cover up an
otherwise blatant violation of the prohibition against forum-shopping. Only in
these and similar instances may the veil be pierced and disregarded.
(Emphasis supplied.)
In fine, to justify the piercing of the veil of corporate fiction, it must be shown by
clear and convincing proof that the separate and distinct personality of the
corporation was purposefully employed to evade a legitimate and binding
commitment and perpetuate a fraud or like wrongdoings. To be sure, the Court
38
has, on numerous occasions, applied the principle where a corporation is
dissolved and its assets are transferred to another to avoid a financial liability
of the first corporation with the result that the second corporation should be
considered a continuation and successor of the first entity.
In those instances when the Court pierced the veil of corporate fiction of two
corporations, there was a confluence of the following factors:
1. A first corporation is dissolved;
2. The assets of the first corporation is transferred to a second
corporation to avoid a financial liability of the first corporation; and
3. Both corporations are owned and controlled by the same persons
such that the second corporation should be considered as a
continuation and successor of the first corporation.
In the instant case, however, the second and third factors are conspicuously
absent. There is, therefore, no compelling justification for disregarding the
fiction of corporate entity separating Kukan, Inc. from KIC. In applying the
principle, both the RTC and the CA miserably failed to identify the presence of
the abovementioned factors. Consider:
The RTC disregarded the separate corporate personalities of Kukan, Inc. and
KIC based on the following premises and arguments:
While it is true that a corporation has a separate and distinct personality from
its stockholder, director and officers, the law expressly provides for an
exception. When Michael Chan, the Managing Director of defendant Kukan,
Inc. (majority stockholder of the newly formed corporation [KIC]) confirmed the
award to plaintiff to supply and install interior signages in the Enterprise Center

he (Michael Chan, Managing Director of defendant Kukan, Inc.) knew that

there was no sufficient corporate funds to pay its obligation/account, thus
implying bad faith on his part and fraud in contracting the obligation. Michael
Chan neither returned the interior signages nor tendered payment to the
plaintiff. This circumstance may warrant the piercing of the veil of corporation
fiction. Having been guilty of bad faith in the management of corporate matters
the corporate trustee, director or officer may be held personally liable. x x x
Since fraud is a state of mind, it need not be proved by direct evidence but may
be inferred from the circumstances of the case. x x x [A]nd the circumstances
are: the signature of Michael Chan, Managing Director of Kukan, Inc.
appearing in the confirmation of the award sent to the plaintiff; signature of
Chan Kai Kit, a British National appearing in the Articles of Incorporation and
signature of Michael Chan also a British National appearing in the Articles of
Incorporation [of] Kukan International Corp. give the impression that they are
one and the same person, that Michael Chan and Chan Kai Kit are both
majority stockholders of Kukan International Corp. and Kukan, Inc. holding
40% of the stocks; that Kukan International Corp. is practically doing the same
39
kind of business as that of Kukan, Inc. (Emphasis supplied.)
As is apparent from its disquisition, the RTC brushed aside the separate
corporate existence of Kukan, Inc. and KIC on the main argument that Michael
Chan owns 40% of the common shares of both corporations, obviously
oblivious that overlapping stock ownership is a common business
phenomenon. It must be remembered, however, that KICs properties were the
ones seized upon levy on execution and not that of Kukan, Inc. or of Michael
Chan for that matter. Mere ownership by a single stockholder or by another
corporation of a substantial block of shares of a corporation does not, standing
alone, provide sufficient justification for disregarding the separate corporate
40
personality. For this ground to hold sway in this case, there must be proof
that Chan had control or complete dominion of Kukan and KICs finances,
policies, and business practices; he used such control to commit fraud; and the
control was the proximate cause of the financial loss complained of by
Morales. The absence of any of the elements prevents the piercing of the
41
corporate veil. And indeed, the records do not show the presence of these
elements.
On the other hand, the CA held:
In the present case, the facts disclose that Kukan, Inc. entered into a
contractual obligation x x x worth more than three million pesos although it had
only Php5,000.00 paid-up capital; [KIC] was incorporated shortly before Kukan,
Inc. suddenly ceased to appear and participate in the trial; [KICs] purpose is
related and somewhat akin to that of Kukan, Inc.; and in [KIC] Michael Chan,
a.k.a., Chan Kai Kit, holds forty percent of the outstanding stocks, while he
formerly held the same amount of stocks in Kukan Inc. These would lead to the
inescapable conclusion that Kukan, Inc. committed fraudulent representation

by awarding to the private respondent the contract with full knowledge that it
was not in a position to comply with the obligation it had assumed because of
inadequate paid-up capital. It bears stressing that shareholders should in good
faith put at the risk of the business, unencumbered capital reasonably
adequate for its prospective liabilities. The capital should not be illusory or
trifling compared with the business to be done and the risk of loss.
Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc.
Michael Chan, a.k.a. Chan Kai Kit has the largest block of shares in both
business enterprises. The emergence of the former was cleverly timed with the
hasty withdrawal of the latter during the trial to avoid the financial liability that
was eventually suffered by the latter. The two companies have a related
business purpose. Considering these circumstances, the obvious conclusion is
that the creation of Kukan International Corporation served as a device to
evade the obligation incurred by Kukan, Inc. and yet profit from the goodwill
attained by the name "Kukan" by continuing to engage in the same line of
42
business with the same list of clients. (Emphasis supplied.)
Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and
the similarity of the business activities in which both corporations are engaged
as a jumping board to its conclusion that the creation of KIC "served as a
device to evade the obligation incurred by Kukan, Inc." The appellate court,
however, left a gaping hole by failing to demonstrate that Kukan, Inc. and its
stockholders defrauded Morales. In fine, there is no showing that the
incorporation, and the separate and distinct personality, of KIC was used to
defeat Morales right to recover from Kukan, Inc. Judging from the records, no
serious attempt was made to levy on the properties of Kukan, Inc. Morales
could not, thus, validly argue that Kukan, Inc. tried to avoid liability or had no
property against which to proceed.
Morales further contends that Kukan, Inc.s closure is evidenced by its failure
to file its 2001 General Information Sheet (GIS) with the Securities and
Exchange Commission. However, such fact does not necessarily mean that
Kukan, Inc. had altogether ceased operations, as Morales would have this
Court believe, for it is stated on the face of the GIS that it is only upon a failure
to file the corporate GIS for five (5) consecutive years that non-operation shall
be presumed.
The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only
had a paid-up capital of PhP 5,000 is not an indication of the intent on the part
of its management to defraud creditors. Paid-up capital is merely seed money
to start a corporation or a business entity. As in this case, it merely represented
the capitalization upon incorporation in 1997 of Kukan, Inc. Paid-up
capitalization of PhP 5,000 is not and should not be taken as a reflection of the
firms capacity to meet its recurrent and long-term obligations. It must be borne
in mind that the equity portion cannot be equated to the viability of a business
concern, for the best test is the working capital which consists of the liquid

assets of a given business relating to the nature of the business

concern.lawphil
Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation
be viewed as a badge of fraud, for it is in compliance with Sec. 13 of the
43
Corporation Code, which only requires a minimum paid-up capital of PhP
5,000.1avvphi1
The suggestion that KIC is but a continuation and successor of Kukan, Inc.,
owned and controlled as they are by the same stockholders, stands without
factual basis. It is true that Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the
outstanding capital stock of both corporations. But such circumstance, standing
alone, is insufficient to establish identity. There must be at least a substantial
identity of stockholders for both corporations in order to consider this factor to
be constitutive of corporate identity.
44

It would not avail Morales any to rely on General Credit Corporation v. Alsons
45
Development and Investment Corporation. General Credit Corporation is
factually not on all fours with the instant case. There, the common stockholders
of the corporations represented 90% of the outstanding capital stock of the
companies, unlike here where Michael Chan merely represents 40% of the
outstanding capital stock of both KIC and Kukan, Inc., not even a majority of it.
In that case, moreover, evidence was adduced to support the finding that the
funds of the second corporation came from the first. Finally, there was proof in
General Credit Corporation of complete control, such that one corporation was
a mere dummy or alter ego of the other, which is absent in the instant case.
Evidently, the aforementioned case relied upon by Morales cannot justify the
application of the principle of piercing the veil of corporate fiction to the instant
case. As shown by the records, the name Michael Chan, the similarity of
business activities engaged in, and incidentally the word "Kukan" appearing in
the corporate names provide the nexus between Kukan, Inc. and KIC. As
illustrated, these circumstances are insufficient to establish the identity of KIC
as the alter ego or successor of Kukan, Inc.
It bears reiterating that piercing the veil of corporate fiction is frowned upon.
Accordingly, those who seek to pierce the veil must clearly establish that the
separate and distinct personalities of the corporations are set up to justify a
wrong, protect fraud, or perpetrate a deception. In the concrete and on the
assumption that the RTC has validly acquired jurisdiction over the party
concerned, Morales ought to have proved by convincing evidence that Kukan,
Inc. was collapsed and thereafter KIC purposely formed and operated to
defraud him. Morales has not to us discharged his burden.
WHEREFORE, the petition is hereby GRANTED. The CAs January 23, 2008
Decision and April 16, 2008 Resolution in CA-G.R. SP No. 100152 are hereby

REVERSED and SET ASIDE. The levy placed upon the personal properties of
Kukan International Corporation is hereby ordered lifted and the personal
properties ordered returned to Kukan International Corporation. The RTC of
Manila, Branch 21 is hereby directed to execute the RTC Decision dated
November 28, 2002 against Kukan, Inc. with reasonable dispatch.

overpayment of documentary stamp tax and surcharges, as well as the

2
Resolution dated March 27, 2001 likewise denying petitioners Motion for
Reconsideration.

No costs.

Sometime in 1994, petitioner sought to invest in JAKA Equities Corporation

(JEC), which was then planning to undertake an initial public offering (IPO) and
listing of its shares of stock with the Philippine Stock Exchange. JEC increased
its authorized capital stock from One Hundred Eighty-Five Million Pesos
(P185,000,000.00) to Two Billion Pesos (P2,000,000,000.00). Petitioner
proposed to subscribe to Five Hundred Eight Million Eight Hundred Six
Thousand Two Hundred Pesos (P508,806,200.00) out of the increase in the
authorized capital stock of JEC through a tax-free exchange under Section
34(c)(2) of the National Internal Revenue Code (NIRC) of 1977, as amended,
which was effected by the execution of a Subscription Agreement and Deed of
Assignment of Property in Payment of Subscription. Under this Agreement, as
payment for its subscription, petitioner will assign and transfer to JEC the
following shares of stock:

SO ORDERED.
PRESBITERO J. VELASCO, JR.
Associate Justice

The antecedent facts are undisputed.

(a) 154,208,404 shares in Republic Glass Holdings Corporation

(RGHC),
(b) 2,822,500 shares in Philippine Global Communications, Inc.
(PGCI),
(c) 7,495,488 shares in United Coconut Planters Bank (UCPB), and
(d) 1,313,176 shares in Far East Bank and Trust Company (FEBTC).

G.R. No. 147629

July 28, 2010

JAKA INVESTMENTS CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
1

Before the Court is a petition for review of the Decision of the Court of Appeals
dated August 22, 2000 sustaining the Court of Tax Appeals in denying
petitioners (JAKA Investments Corporations) claim for refund of its alleged

The intended IPO and listing of shares of JEC did not materialize. However,
JEC still decided to proceed with the increase in its authorized capital stock
and petitioner agreed to subscribe thereto, but under different terms of
payment. Thus, petitioner and JEC executed the Amended Subscription
4
Agreement on September 5, 1994, wherein the above-enumerated RGHC,
PGCI, and UCPB shares of stock were transferred to JEC. In lieu of the
FEBTC shares, however, the amount of Three Hundred Seventy Million Seven
Hundred Sixty-Six Thousand Pesos (P370,766,000.00) was paid for in cash by
petitioner to JEC.
On October 14, 1994, petitioner paid One Million Three Thousand Eight
Hundred Ninety-Five Pesos and Sixty-Five Centavos (P1,003,895.65) for basic
documentary stamp tax inclusive of the 25% surcharge for late payment on the
Amended Subscription Agreement, broken down as follows:
Documentary Stamp Tax - P803,116.72

25% Surcharge - 200,778.93

5

Total P1,003,895.65

On October 17, 1994, Revenue District Officer (RDO) Atty. Sixto S. Esquivias
6
IV (RDO Esquivias) issued three Certifications, as follows:
Cert. No.

Shares of Stock

94-10-17-07 7,495,488 UCPB shares

Documentary Stamps
P 23,423.14

94-10-17-08 154,208,403 RGHC shares 481,901.88

94-10-17-14 2,822,500 PGCI shares

88,203.13
P593,528.15

Petitioner, after seeing the RDOs certifications, the total amount of which was
less than the actual amount it had paid as documentary stamp tax, concluded
that it had overpaid. Petitioner subsequently sought a refund for the alleged
excess documentary stamp tax and surcharges it had paid on the Amended
Subscription Agreement in the amount of Four Hundred Ten Thousand Three
Hundred Sixty-Seven Pesos (P410,367.00), the difference between the
amount of documentary stamp tax it had paid and the amount of documentary
7
stamp tax certified to by the RDO, through a letter-request to the BIR dated
October 10, 1996.
On October 11, 1996, petitioner filed a petition for refund before the Court of
Tax Appeals, docketed as C.T.A. Case No. 5428, which was denied in a
8
Decision dated January 19, 1999. The Court of Tax Appeals likewise denied
9
petitioners Motion for Reconsideration in its Resolution dated March 1, 1999.
Petitioner appealed to the Court of Appeals by way of petition for review. The
Court of Appeals sustained the Court of Tax Appeals in its Decision on CAG.R. SP No. 51834 dated August 22, 2000 as well as in its Resolution dated
March 27, 2001 of petitioners Motion for Reconsideration.
Hence, petitioner is now before this Court to seek the reversal of the
questioned Decision and Resolution of the Court of Appeals.
Petitioners main contention in this claim for refund is that the tax base for the
documentary stamp tax on the Amended Subscription Agreement should have
been only the shares of stock in RGHC, PGCI, and UCPB that petitioner had
transferred to JEC as payment for its subscription to the JEC shares, and
should not have included the cash portion of its payment, based on Section
176 of the National Internal Revenue Code of 1977, as amended by Republic

Act No. 7660, or the New Documentary Stamps Tax Law (the 1994 Tax Code),
the law applicable at the time of the transaction. Petitioner argues that the cash
component of its payment for its subscription to the JEC shares, totaling Three
Hundred Seventy Million Seven Hundred Sixty-Six Thousand Pesos
(P370,766,000.00) should not have been charged any documentary stamp tax.
Petitioner claims that there was overpayment because the tax due on the
transferred shares was only Five Hundred Ninety-Three Thousand Five
Hundred Twenty-Eight and 15/100 Pesos (P593,528.15), as indicated in the
certifications issued by RDO Esquivias. Petitioner alleges that it is entitled to a
refund for the overpayment, which is the difference in the amount it had
actually paid (P1,003,895.65) and the amount of documentary stamp tax due
on the transfer of said shares (P593,528.15), or a total of Four Hundred Ten
Thousand Three Hundred Sixty-Seven Pesos (P410,367.00).
Petitioner contends that both the Court of Appeals and the Court of Tax
Appeals erroneously relied on respondents (Commissioner of Internal
Revenues) assertions that it had paid the documentary stamp tax on the
original issuance of the shares of stock of JEC under Section 175 of the 1994
Tax Code.
Petitioner explains that in this instance where shares of stock are used as
subscription payment, there are two documentary stamp tax incidences,
namely, the documentary stamp tax on the original issuance of the shares
subscribed (the JEC shares), which is imposed under Section 175; and the
documentary stamp tax on the shares transferred in payment of such
subscription (the transfer of the RGHC, PGCI and UCPB shares of stock from
petitioner to JEC), which is imposed under Section 176 of the 1994 Tax Code.
Petitioner argues that the documentary stamp tax imposed under Section 175
is due on original issuances of certificates of stock and is computed based on
the aggregate par value of the shares to be issued; and that these certificates
of stock are issued only upon full payment of the subscription price such that
under the Bureau of Internal Revenues (BIRs) Revised Documentary Stamp
10
Tax Regulations, it is stated that the documentary stamp tax on the original
issuance of certificates of stock is imposed on fully paid shares of stock only.
Petitioner alleges that it is the issuing corporation which is primarily liable for
the payment of the documentary stamp tax on the original issuance of shares
of stock. Petitioner further argues that the documentary stamp tax on Section
176 of the 1994 Tax Code is imposed for every transfer of shares or
certificates of stock, computed based on the par value of the shares to be
transferred, and is due whether a certificate of stock is actually issued,
indorsed or delivered pursuant to such transfer. It is the transferor who is liable
for the documentary stamp tax on the transfer of shares.
Petitioner claims that the documentary stamp tax under Section 175 attaches
to the certificate/s of stock to be issued by virtue of petitioners subscription
while the documentary stamp tax under Section 176 attaches to the Amended

Subscription Agreement, since it is this instrument that evidences the transfer

of the RGHC, PGCI and UCPB shares from petitioner to JEC.
Petitioner contends that at the time of the execution of the Amended
Subscription Agreement, the JEC shares or certificates subscribed by
petitioner could not have been issued by JEC because the same were yet to
be sourced from the increase in authorized capital stock of JEC, which in turn
had yet to be approved by the Securities and Exchange Commission (SEC).
Petitioner thus reasons that the documentary stamp tax under Section 175
could not have accrued at the time the Amended Subscription Agreement was
executed because no right to the shares had neither been nor could be
established in favor of the petitioner at such time. Petitioner theorizes that the
earliest time that the subscription could actually be executed would be when
the SEC approves the increase in the authorized capital stock of JEC. On the
other hand, upon the execution of the Amended Subscription Agreement, the
assignment or the transfer of RGHC, PGCI and UCPB shares in favor of JEC
(which is evidenced by said agreement), is deemed immediately enforceable
as this is a necessary requirement of the SEC.
Petitioner points out that Section 175 of the 1994 Tax Code imposes a
documentary stamp tax on every original issuance of certificates of stock,
whereas Republic Act No. 8424, the Tax Reform Act of 1997 (the 1997 Tax
Code), amended this provision and imposed a documentary stamp tax on the
original issuance of shares of stock. Petitioner argues that under Section 175
of the 1994 Tax Code, there was no documentary stamp tax due on the mere
execution of a subscription agreement to shares of stock, and the tax only
accrued upon issuance of the certificates of stock. In this case, the change in
wording introduced by the 1997 Tax Code cannot be made applicable to the
Amended Subscription Agreement, which was executed in 1994, because it is
a well-settled doctrine in taxation that a law must have prospective application.
Lastly, petitioner alleges that it is entitled to refund under the NIRC.

11

12

In his Comment (To Petition for Review), respondent avers that the lower
courts did not err in denying petitioners claim for refund, and that petitioner is
raising issues in this petition which were not raised in the lower courts.
Respondent maintains that the documentary stamp tax imposed in this case is
on the original issue of certificates of stock of JEC on the subscription by the
petitioner of the P508,806,200.00 shares out of the increase in the authorized
capital stock of the former pursuant to Section 175 of the NIRC. The
documentary stamp tax was not imposed on the shares of stock owned by
petitioner in RGHC, PGCI, and UCPB, which merely form part of the partial
payment of the subscribed shares in JEC. Respondent avers that the amounts
indicated in the Certificates of RDO Esquivias are the amounts of documentary
stamp tax representing the equivalent of each group of shares being applied
for payment. Considering that the amount of documentary stamp tax

represented by the shares of stock in the aforementioned companies

amounted only to P593,528.15, while the basic documentary stamp tax for the
entire subscription of P508,806,200.00 was computed by respondents
revenue officers to the tune of P803,116.72, exclusive of the penalties, leaving
a balance of P209,588.57, is a clear indication that the payment made with the
shares of stock is insufficient.
Respondent claims that the certifications were issued by RDO Esquivias
purposely to allow the registration of transfer of the shares of stock used in
payment of the subscribed shares in the name of JEC from petitioner by the
Corporate Secretary of the UCPB and are not evidence of the payment of the
documentary stamp tax on the issuance of the increased shares of stocks of
13
JEC.
Respondent argues that the documentary stamp tax attaches upon acceptance
by the corporation of the stockholders subscription in the capital stock of the
corporation, and that the term "original issue" of the certificate of stock means
"the point at which the stockholder acquires and may exercise attributes of
14
ownership over the stocks." Respondent further argues that the stocks can
be alienated; the dividends or fruits derived therefrom can be enjoyed; and
they can be conveyed, pledged, or encumbered; that the certificate,
irrespective of whether or not it is in the actual constructive possession of the
stockholder, is considered issued because it is with value and, hence, the
documentary stamp tax must be paid; and concludes that a person may own
shares of stock without possessing a certificate of stock. Respondent cites
15
Commissioner of Internal Revenue v. Construction Resources of Asia, Inc.,
where the Court held:
The delivery of the certificates of stocks to the private respondent's
stockholders whether actual or constructive, is not essential for the
documentary and science stamps taxes to attach. What is taxed is the privilege
of issuing shares of stock and, therefore, the taxes accrue at the time the
shares are issued. The only question before us is whether or not said private
respondents issued the certificates of stock covering the paid-in-capital of
P17,880,000.00.
Respondent claims that it is well-settled as a general rule of Corporation Law
that a subscriber for stock in a corporation or purchaser of stock becomes a
stockholder as soon as his subscription is accepted by the corporation whether
a certificate of stock is issued to him or not, and although he may have no
certificate, he is thereupon entitled to all the rights and is subject to all the
liabilities of a stockholder.
Respondent argues, based on the above, that the contention of petitioner that
the documentary stamp tax under Section 175 of the 1994 Tax Code could not
have accrued at the time the Amended Subscription Agreement was executed
since the increase in capital stock of JEC had yet to be approved by the SEC

was inaccurate. He states that it is evident from the Amended Subscription

Agreement that the subscribed shares from the increase in JECs stock were
fully paid through cash and shares of stock.
Respondent submits that the change in wording, from "certificates" to "shares"
of stock, introduced to Section 175 by the 1997 Tax Code, was a mere
clarification and codification of the foregoing principle or policy.
Respondent stresses that the documentary stamp tax can be levied or
collected from the person making, signing, issuing, accepting, or transferring
the obligation or property, as provided in Section 173 of the Tax Code.
16

In its Reply to Respondents Comment to the Petition, petitioner contends

that respondent erroneously insists that the documentary stamp tax sought to
be refunded is the one imposed on the subscription by petitioner to
P508,806,200.00 new shares of JEC. Petitioner further contends that since the
documentary stamp tax due on the issuance of new shares or on original
shares is P2.00 for every P200 under Section 175 of the Tax Code, then the
documentary stamp tax on petitioners subscription to JEC shares should
amount to P5,088,062.00, which is much higher than the P803,116.72 basic
17
documentary stamp tax paid under ATAP No. 1511920. Petitioner argues
that at the time the documentary stamp tax was paid, before a taxpayer was
allowed to pay the taxes due, a BIR revenue officer would first compute the tax
due and then issue an authority to accept payment (ATAP) and it was very
unlikely that the revenue officer could have made such a glaring mistake.
Petitioner alleges that there is no BIR certification requirement prior to the
issuance of original shares of stock; and that it is only upon the regular annual
audit of the books of a corporation that the BIR determines if the documentary
stamp tax on new or original issuances of shares, if any were issued, had in
fact been paid. If not, then a deficiency assessment, with penalties and
surcharges, would then be made by the BIR. Petitioner further alleges that, on
the other hand, before the transfer of issued and outstanding shares to a new
owner is recorded in the books of a corporation, the capital gains tax thereon
and the documentary stamp tax on the transfer must first be paid, and a BIR
certification must be presented to the Corporate Secretary authorizing the
corporation to record the transfer, otherwise, the corporate secretary shall be
subjected to penalties.
Petitioner claims that the three BIR certifications in this case specifically allow
the registration of the UCPB, RGHC, and PGCI shares in the name of JEC, the
transferee, and that said certifications evidence payment of the taxes due on
the transfer of the shares from petitioner to JEC, not on the original issuance of
shares of JEC.

The parties respective memoranda contained reiterations of the allegations

raised in their respective pleadings as discussed above.
The sole issue to be resolved is whether petitioner is entitled to a partial refund
of the documentary stamp tax and surcharges it paid on the execution of the
Amended Subscription Agreement.
In claims for refund, the burden of proof is on the taxpayer to prove entitlement
to such refund. As we held in Compagnie Financiere Sucres Et Denrees v.
18
Commissioner of Internal Revenue Along with police power and eminent domain, taxation is one of the three basic
and necessary attributes of sovereignty. Thus, the State cannot be deprived of
this most essential power and attribute of sovereignty by vague implications of
law. Rather, being derogatory of sovereignty, the governing principle is that tax
exemptions are to be construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority; and he who claims an exemption
must be able to justify his claim by the clearest grant of statute.
x x x Tax refunds are a derogation of the State's taxing power. Hence, like tax
exemptions, they are construed strictly against the taxpayer and liberally in
favor of the State. Consequently, he who claims a refund or exemption from
taxes has the burden of justifying the exemption by words too plain to be
mistaken and too categorical to be misinterpreted. x x x.
It was thus incumbent upon petitioner to show clearly its basis for claiming that
it is entitled to a tax refund. This, to our mind, the petitioner failed to do.
The Court of Tax Appeals construed the claim for exemption strictly against
petitioner and held that:
The focal issue which is presented for our consideration is whether or not the
transfer of the 1,313,176 FEBTC shares under the "Amended Subscription
Agreement and Deed of Assignment of Property in Payment of Subscription"
should be excluded in the taxable base for the computation of DST, thus
entitling petitioner to the refund of the amount of P410,367.00.
We find nothing ambiguous nor obscure in the language of Section 173, taken
in relation to Section 175 of the 1994 Tax Code x x x insofar as the same is
brought to bear upon the circumstances in the instant case. These provisions
furnish the best means of their own exposition that a documentary stamp tax
(DST) is due and payable on documents, instruments, loan agreements and
papers, acceptances, assignments, sales and transfers which evidenced the
transaction agreed upon by the parties and should be paid by the person
making, signing, issuing, accepting or transferring the property, right or
obligation.

Sec. 173. Stamp taxes upon documents, instruments, and papers. Upon
documents, instruments, and papers, and upon acceptances, assignments,
sales, and transfers of the obligation, or property incident thereto, there shall
be levied, collected and paid for, and in respect of the transaction so had or
accomplished, the corresponding documentary stamp taxes prescribed in the
following sections of this Title, by the person making, signing, issuing,
accepting, or transferring the same, whenever the document is made, signed,
issued, accepted or transferred when the obligation or right arises from
Philippine sources or the property is situated in the Philippines, and at the
same time such act is done or transaction had: Provided, That whenever one
party to the taxable document enjoys exemption from the tax herein imposed,
the other party thereto who is not exempt shall be the one directly liable for the
tax. (as amended by R.A. No. 7660)

Petitioner alleges, though, that considering that the assessment of payment of

documentary stamp tax was made payable only to the aforesaid issuances of
certificates of [stock] exclusive of that of FEBTC shares of stock which were
paid in cash, and that it has paid a total of Php1,003,895.65 inclusive of
surcharges for late payment, the petitioner is entitled to a refund of
Php410,367.00. This argument does not hold water. As discussed earlier, a
documentary stamp is levied upon the privilege, the opportunity and the facility
offered at exchanges for the transaction of the business. This being the case,
and as correctly found by the tax court, the documentary stamp tax imposition
is essentially addressed and directly brought to bear upon the document
evidencing the transaction of the parties which establishes its rights and
obligations, which in the case at bar, was established and enforceable upon
the execution of the Amended Subscription Agreement and Deed of
Assignment of Property in Payment of Subscription.

xxxx
Understood to mean what it plainly expressed, the DST imposition is
essentially addressed and directly brought to bear upon the DOCUMENT
evidencing the transaction of the parties which establishes its rights and
obligations.
In the case at bar, the rights and obligations between petitioner JAKA
Investments Corporation and JAKA Equities Corporation are established and
enforceable at the time the "Amended Subscription Agreement and Deed of
Assignment of Property in Payment of Subscription" were signed by the parties
and their witness, so is the right of the state to tax the aforestated document
evidencing the transaction. DST is a tax on the document itself and therefore
the rate of tax must be determined on the basis of what is written or indicated
on the instrument itself independent of any adjustment which the parties may
agree on in the future x x x. The DST upon the taxable document should be
paid at the time the contract is executed or at the time the transaction is
accomplished. The overriding purpose of the law is the collection of taxes. So
that when it paid in cash the amount of P370,766,000.00 in substitution for, or
replacement of the 1,313,176 FEBTC shares, its payment of P1,003,835.65
documentary stamps tax pursuant to Section 175 of NIRC is in order.
Thus, applying the settled rule in this jurisdiction that, a claim for refund is in
the nature of a claim for exemption, thus, should be construed in strictissimi
juris against the taxpayer (Commissioner of Internal Revenue vs. Tokyo
Shipping Co., Ltd., 244 SCRA 332) and since the petitioner failed to adduce
evidence that will show that it is exempt from DST under Section 199 or other
19
provision of the tax code, We rule the focal issue in the negative. (Emphases
ours.)
In the questioned Decision, the Court of Appeals concurred with the findings of
the Court of Tax Appeals and we quote with approval the relevant portions
below:

Moreover, the documentary stamp tax is imposed on the entire subscription

(i.e., subscribed capital stock) which is the amount of the capital stock
subscribed whether fully paid or not. It connotes an original subscription
contract for the acquisition by a subscriber of unissued shares in a corporation,
which in this case is equivalent to a total par value of Php508,806,200.00.
Besides, a tax cannot be imposed unless it is supported by the clear and
express language of a statute; on the other hand, once the tax is
unquestionably imposed, a claim of exemption from tax payments must be
clearly shown and based on language in the law too plain to be mistaken. And
since a claim for refund is in the nature of a claim for exemption the same is
likewise construed in strictissimi juris against the taxpayer. Furthermore, it is a
basic rule in taxation that the factual findings of the Court of Tax Appeals,
when supported by substantial evidence, will not be disturbed on appeal unless
it [is] shown that the said court committed gross error in the appreciation of
facts. In this case, the tax court did not deviate from this rule.
We find no error in the above pronouncements of the Court of Appeals.
A documentary stamp tax is in the nature of an excise tax. It is not imposed
upon the business transacted but is an excise upon the privilege, opportunity
or facility offered at exchanges for the transaction of the business. It is an
excise upon the facilities used in the transaction of the business separate and
apart from the business itself. Documentary stamp taxes are levied on the
exercise by persons of certain privileges conferred by law for the creation,
revision, or termination of specific legal relationships through the execution of
20
specific instruments.
Thus, we have held that documentary stamp taxes are levied independently of
the legal status of the transactions giving rise thereto. The documentary stamp
taxes must be paid upon the issuance of the said instruments, without regard

to whether the contracts which gave rise to them are rescissible, void,
21
voidable, or unenforceable.
The relevant provisions of the Tax Code at the time of the transaction are
quoted below:
Sec. 175. Stamp tax on original issue of certificates of stock. On every
original issue, whether on organization, reorganization or for any lawful
purpose, of certificates of stock by any association, company, or corporations,
there shall be collected a documentary stamp tax of Two pesos (P2.00) on
each two hundred pesos, or fractional part thereof, of the par value of such
certificates: Provided, That in the case of the original issue of stock without par
value the amount of the documentary stamp tax herein prescribed shall be
based upon the actual consideration received by the association, company, or
corporation for the issuance of such stock, and in the case of stock dividends
on the actual value represented by each share.

that the DST attaches upon acceptance of the stockholder's subscription in the
corporation's capital stock regardless of actual or constructive delivery of the
certificates of stock. Citing Philippine Consolidated Coconut Ind., Inc. v.
Collector of Internal Revenue, the Court held:
The documentary stamp tax under this provision of the law may be levied only
once, that is upon the original issue of the certificate. The crucial point
therefore, in the case before Us is the proper interpretation of the word 'issue'.
In other words, when is the certificate of stock deemed 'issued' for the purpose
of imposing the documentary stamp tax? Is it at the time the certificates of
stock are printed, at the time they are filled up (in whose name the stocks
represented in the certificate appear as certified by the proper officials of the
corporation), at the time they are released by the corporation, or at the time
they are in the possession (actual or constructive) of the stockholders owning
them?
xxxx

Sec. 176. Stamp tax on sales, agreements to sell, memoranda of sales,

deliveries or transfer of due-bills, certificates of obligation, or shares or
certificates of stock. On all sales, or agreements to sell, or memoranda of
sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares
or certificates of stock in any association, company or corporation, or transfer
of such securities by assignment in blank, or by delivery, or by any paper or
agreement, or memorandum or other evidences of transfer or sale whether
entitling the holder in any manner to the benefit of such due-bills, certificates of
obligation or stock, or to secure the future payment of money, or for the future
transfer of any due-bill, certificates of obligation or stock, there shall be
collected a documentary stamp tax of One peso (P1.00) on each two hundred
pesos, or fractional part thereof, of the par value of such due-bill, certificates of
obligation or stock: Provided, That only one tax shall be collected on each sale
or transfer of stock or securities from one person to another, regardless of
whether or not a certificate of stock or obligation is issued, endorsed, or
delivered in pursuance of such sale or transfer: and Provided, further, That in
the case of stock without par value the amount of the documentary stamp
herein prescribed shall be equivalent to twenty-five per centum of the
documentary stamp tax paid upon the original issue of said stock: Provided,
furthermore, That the tax herein imposed shall be increased to One peso and
fifty centavos (P1.50) beginning 1996.
We find our discussion in the case of Commissioner of Internal Revenue v.
22
First Express Pawnshop Company, Inc. regarding these same provisions of
the Tax Code to be instructive, and we quote:
In Section 175 of the Tax Code, DST is imposed on the original issue of shares
of stock. The DST, as an excise tax, is levied upon the privilege, the
opportunity and the facility of issuing shares of stock. In Commissioner of
Internal Revenue v. Construction Resources of Asia, Inc., this Court explained

Ordinarily, when a corporation issues a certificate of stock (representing the

ownership of stocks in the corporation to fully paid subscription) the certificate
of stock can be utilized for the exercise of the attributes of ownership over the
stocks mentioned on its face. The stocks can be alienated; the dividends or
fruits derived therefrom can be enjoyed, and they can be conveyed, pledged or
encumbered. The certificate as issued by the corporation, irrespective of
whether or not it is in the actual or constructive possession of the stockholder,
is considered issued because it is with value and hence the documentary
stamp tax must be paid as imposed by Section 212 of the National Internal
Revenue Code, as amended.
In Section 176 of the Tax Code, DST is imposed on the sales, agreements to
sell, memoranda of sales, deliveries or transfer of shares or certificates of
stock in any association, company, or corporation, or transfer of such securities
by assignment in blank, or by delivery, or by any paper or agreement, or
memorandum or other evidences of transfer or sale whether entitling the holder
in any manner to the benefit of such certificates of stock, or to secure the future
payment of money, or for the future transfer of certificates of stock. In
Compagnie Financiere Sucres et Denrees v. Commissioner of Internal
Revenue, this Court held that under Section 176 of the Tax Code, sales to
secure the future transfer of due-bills, certificates of obligation or certificates of
stock are subject to documentary stamp tax.
Revenue Memorandum Order No. 08-98 (RMO 08-98) provides the guidelines
on the corporate stock documentary stamp tax program. RMO 08-98 states
that:

1. All existing corporations shall file the Corporation Stock DST Declaration,
and the DST Return, if applicable when DST is still due on the subscribed
share issued by the corporation, on or before the tenth day of the month
following publication of this Order.
xxxx
STDEH
3. All existing corporations with authorization for increased capital stock shall
file their Corporate Stock DST Declaration, together with the DST Return, if
applicable when DST is due on subscriptions made after the
authorization, on or before the tenth day of the month following the date of
authorization. (Boldfacing supplied)
RMO 08-98, reiterating Revenue Memorandum Circular No. 47-97 (RMC 4797), also states that what is being taxed is the privilege of issuing shares of
stock, and, therefore, the taxes accrue at the time the shares are issued. RMC
47-97 also defines issuance as the point in which the stockholder acquires and
may exercise attributes of ownership over the stocks.

petitioners subscription to the original issuance of JEC shares. It should not be

used as evidence of payment of documentary stamp tax. Neither should it be
the lone basis of a claim for a documentary stamp tax refund.
The fact that it was petitioner and not JEC that paid for the documentary stamp
tax on the original issuance of shares is of no moment, as Section 173 of the
1994 Tax Code states that the documentary stamp tax shall be paid by the
person making, signing, issuing, accepting or transferring the property, right or
obligation.
Lastly, we deem it appropriate to reiterate the well-established doctrine that as
a matter of practice and principle, this Court will not set aside the conclusion
reached by an agency, like the Court of Tax Appeals, especially if affirmed by
the Court of Appeals. By the very nature of its function, it has dedicated itself 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
23
exercise of authority on its part, which we find is not present here.
WHEREFORE, premises considered, the petition is hereby DISMISSED.
SO ORDERED.

As pointed out by the CTA, Sections 175 and 176 of the Tax Code contemplate
a subscription agreement in order for a taxpayer to be liable to pay the DST. A
subscription contract is defined as any contract for the acquisition of unissued
stocks in an existing corporation or a corporation still to be formed. A stock
subscription is a contract by which the subscriber agrees to take a certain
number of shares of the capital stock of a corporation, paying for the same or
expressly or impliedly promising to pay for the same. (Emphases ours.)
Petitioner claims overpayment of the documentary stamp tax but its basis for
such is not clear at all. While insisting that the documentary stamp tax it had
paid for was not based on the original issuance of JEC shares as provided in
Section 175 of the 1994 Tax Code, petitioner failed in showing, even through a
mere basic computation of the tax base and the tax rate, that the documentary
stamp tax was based on the transfer of shares under Section 176 either. It
would have been helpful for petitioners cause had it submitted proof of the par
value of the shares of stock involved, to show the actual basis for the
documentary stamp tax computation. For comparison, the original Subscription
Agreement ought to have been submitted as well.
All that petitioner submitted to back up its claim were the certifications issued
by then RDO Esquivias.1wphi1 As correctly pointed out by respondent,
however, the amounts in the RDO certificates were the amounts of
documentary stamp tax representing the equivalent of each group of shares
being applied for payment. The purpose for issuing such certifications was to
allow registration of transfer of shares of stock used in partial payment for

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG,

WILLIAM T. ONG, WILLIE T. ONG, and JULIE ONG ALONZO, petitioners,
vs.
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE
Y. TIU, JOHN YU, LOURDES C. TIU, INTRALAND RESOURCES
DEVELOPMENT CORP., MASAGANA TELAMART, INC., REGISTER OF
DEEDS OF PASAY CITY, and the SECURITIES AND EXCHANGE
COMMISSION, respondents.
x-----------------------------x
G.R. No. 144629

April 8, 2003

DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE
Y. TIU, JOHN YU, LOURDES C. TIU, and INTRALAND RESOURCES
DEVELOPMENT CORP., petitioners,
vs.
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG,
WILLIAM T. ONG, WILLIE T. ONG, and JULIA ONG ALONZO, respondents.
RESOLUTION
CORONA, J.:
Before us are the (1) motion for reconsideration, dated March 15, 2002, of
petitioner movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong,
William Ong, Willie Ong and Julia Ong Alonzo (the Ongs); (2) motion for partial
reconsideration, dated March 15, 2002, of petitioner movant Willie Ong seeking
1
a reversal of this Court's Decision, dated February 1, 2002, in G.R. Nos.
2
144476 and 144629 affirming with modification the decision of the Court of
Appeals, dated October 5, 1999, which in turn upheld, likewise with
modification, the decision of the SEC en banc, dated September 11, 1998; and
(3) motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y.
Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C.
Tiu (the Tius) of our February 1, 2002 Decision.
A brief recapitulation of the facts shows that:

G.R. No. 144476

April 8, 2003

In 1994, the construction of the Masagana Citimall in Pasay City was

threatened with stoppage and incompletion when its owner, the First
Landlink Asia Development Corporation (FLADC), which was owned
by the Tius, encountered dire financial difficulties. It was heavily
indebted to the Philippine National Bank (PNB) for P190 million. To
stave off foreclosure of the mortgage on the two lots where the mall
was being built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T.
Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to

invest in FLADC. Under the Pre-Subscription Agreement they entered

into, the Ongs and the Tius agreed to maintain equal shareholdings in
FLADC: the Ongs were to subscribe to 1,000,000 shares at a par
value of P100.00 each while the Tius were to subscribe to an
additional 549,800 shares at P100.00 each in addition to their already
existing subscription of 450,200 shares. Furthermore, they agreed that
the Tius were entitled to nominate the Vice-President and the
Treasurer plus five directors while the Ongs were entitled to nominate
the President, the Secretary and six directors (including the chairman)
to the board of directors of FLADC. Moreover, the Ongs were given the
right to manage and operate the mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to
1,000,000 shares of stock while the Tius committed to contribute to FLADC a
four-storey building and two parcels of land respectively valued at P20 million
(for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for
49,800 shares) to cover their additional 549,800 stock subscription therein. The
3
Ongs paid in another P70 million to FLADC and P20 million to the Tius over
and above their P100 million investment, the total sum of which (P190 million)
was used to settle the P190 million mortgage indebtedness of FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC, however,
was shortlived because the Tius, on February 23, 1996, rescinded the PreSubscription Agreement. The Tius accused the Ongs of (1) refusing to credit to
them the FLADC shares covering their real property contributions; (2)
preventing David S. Tiu and Cely Y. Tiu from assuming the positions of and
performing their duties as Vice-President and Treasurer, respectively, and (3)
refusing to give them the office spaces agreed upon.

the Tius really wanted were new offices which were anyway subsequently
provided to them. On the most important issue of their alleged failure to credit
the Tius with the FLADC shares commensurate to the Tius' property
contributions, the Ongs asserted that, although the Tius executed a deed of
assignment for the 1,902.30 square-meter lot in favor of FLADC, they (the
Tius) refused to pay P 570,690 for capital gains tax and documentary stamp
tax. Without the payment thereof, the SEC would not approve the valuation of
the Tius' property contribution (as opposed to cash contribution). This, in turn,
would make it impossible to secure a new Transfer Certificate of Title (TCT)
over the property in FLADC's name. In any event, it was easy for the Tius to
simply pay the said transfer taxes and, after the new TCT was issued in
FLADC's name, they could then be given the corresponding shares of stocks.
On the 151 square-meter property, the Tius never executed a deed of
assignment in favor of FLADC. The Tius initially claimed that they could not as
yet surrender the TCT because it was "still being reconstituted" by the
Lichaucos from whom the Tius bought it. The Ongs later on discovered that
FLADC had in reality owned the property all along, even before their PreSubscription Agreement was executed in 1994. This meant that the 151
square-meter property was at that time already the corporate property of
FLADC for which the Tius were not entitled to the issuance of new shares of
stock.
4

The controversy finally came to a head when this case was commenced by
the Tius on February 27, 1996 at the Securities and Exchange Commission
(SEC), seeking confirmation of their rescission of the Pre-Subscription
Agreement. After hearing, the SEC, through then Hearing Officer Rolando G.
Andaya, Jr., issued a decision on May 19, 1997 confirming the rescission
sought by the Tius, as follows:

According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to
assume the positions and perform the duties of Vice-President and Treasurer,
respectively, but the Ongs prevented them from doing so. Furthermore, the
Ongs refused to provide them the space for their executive offices as VicePresident and Treasurer. Finally, and most serious of all, the Ongs refused to
give them the shares corresponding to their property contributions of a fourstory building, a 1,902.30 square-meter lot and a 151 square-meter lot. Hence,
they felt they were justified in setting aside their Pre-Subscription Agreement
with the Ongs who allegedly refused to comply with their undertakings.

WHEREFORE, judgment is hereby rendered confirming the rescission

of the Pre-Subscription Agreement, and consequently ordering:

In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact
assumed the positions of Vice-President and Treasurer of FLADC but that it
was they who refused to comply with the corporate duties assigned to them. It
was the contention of the Ongs that they wanted the Tius to sign the checks of
the corporation and undertake their management duties but that the Tius shied
away from helping them manage the corporation. On the issue of office space,
the Ongs pointed out that the Tius did in fact already have existing executive
offices in the mall since they owned it 100% before the Ongs came in. What

(c) The plaintiffs to submit with (sic) the Securities and Exchange
Commission amended articles of incorporation of FLADC to conform
with this decision;

(a) The cancellation of the 1,000,000 shares subscription of the

individual defendants in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual
defendants representing the return of their contribution for 1,000,000
shares of FLADC;

(d) The defendants to surrender to the plaintiffs TCT Nos. 132493,

132494, 134066 (formerly 15587), 135325 and 134204 and any other

title or deed in the name of FLADC, failing in which said titles are
declared void;
(e) The Register of Deeds to issue new certificates of titles in favor of
the plaintiffs and to cancel the annotation of the Pre-Subscription
Agreement dated 15 August 1994 on TCT No. 134066 (formerly
15587);
(f) The individual defendants, individually and collectively, their agents
and representatives, to desist from exercising or performing any and
all acts pertaining to stockholder, director or officer of FLADC or in any
manner intervene in the management and affairs of FLADC;

1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia
Development Corporation in accordance with the following cash and
property contributions of the parties therein.
(a) Ong Group P100,000,000.00 cash contribution for one
(1) million shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share;
(b) Tiu Group:
1) P45,020,000.00 original cash contribution for
450,200 shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share;

(g) The individual defendants, jointly and severally, to return to FLADC

interest payment in the amount of P8,866,669.00 and all interest
payments as well as any payments on principal received from the
P70,000,000.00 inexistent loan, plus the legal rate of interest thereon
from the date of their receipt of such payment until fully paid;

2) A four-storey building described in Transfer

Certificate of Title No. 15587 in the name of Intraland
Resources and Development Corporation valued at
P20,000,000.00 for 200,000 shares in First Landlink
Asia Development Corporation at a par value of
P100.00 per share;

(h) The plaintiff David Tiu to pay individual defendants the sum of
P20,000,000.00 representing his loan from said defendants plus legal
interest from the date of receipt of such amount.
SO ORDERED.

3) A 1,902.30 square-meter parcel of land covered by

Transfer Certificate of Title No. 15587 in the name of
Masagana Telamart, Inc. valued at P30,000,000.00 for
300,000 shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share.

On motion of both parties, the above decision was partially reconsidered but
only insofar as the Ongs' P70 million was declared not as a premium on capital
stock but an advance (loan) by the Ongs to FLADC and that the imposition of
6
interest on it was correct.

2) Whatever remains of the assets of the First Landlink Asia

Development Corporation and the management thereof is (sic) hereby
ordered transferred to the Tiu Group.

Both parties appealed to the SEC en banc which rendered a decision on

September 11, 1998, affirming the May 19, 1997 decision of the Hearing
Officer. The SEC en banc confirmed the rescission of the Pre-Subscription
Agreement but reverted to classifying the P70 million paid by the Ongs as
premium on capital and not as a loan or advance to FLADC, hence, not entitled
8
to earn interest.
On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999,
thus:
WHEREFORE, the Order dated September 11, 1998 issued by the
Securities and Exchange Commission En Banc in SEC AC CASE
NOS. 598 and 601 confirming the rescission of the Pre-Subscription
Agreement dated August 15, 1994 is hereby AFFIRMED, subject to
the following MODIFICATIONS:

3) First Landlink Asia Development Corporation is hereby ordered to

pay the amount of P70,000,000.00 that was advanced to it by the Ong
Group upon the finality of this decision. Should the former incur in
delay in the payment thereof, it shall pay the legal interest thereon
pursuant to Article 2209 of the New Civil Code.
4) The Tius are hereby ordered to pay the amount of P20,000,000.00
loaned them by the Ongs upon the finality of this decision. Should the
former incur in delay in the payment thereof, it shall pay the legal
interest thereon pursuant to Article 2209 of the New Civil Code.
SO ORDERED.

An interesting sidelight of the CA decision was its description of the rescission

made by the Tius as the "height of ingratitude" and as "pulling a fast one" on

the Ongs. The CA moreover found the Tius guilty of withholding FLADC funds
from the Ongs and diverting corporate income to their own MATTERCO
10
account. These were findings later on affirmed in our own February 1, 2002
11
Decision which is the subject of the instant motion for reconsideration.
But there was also a strange aspect of the CA decision. The CA concluded that
both the Ongs and the Tius were in pari delicto (which would not have legally
entitled them to rescission) but, "for practical considerations," that is, their
inability to work together, it was best to separate the two groups by rescinding
the Pre-Subscription Agreement, returning the original investment of the Ongs
and awarding practically everything else to the Tius.
Their motions for reconsideration having been denied, both parties filed
separate petitions for review before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the
Ongs argued that the Tius may not properly avail of rescission under Article
1191 of the Civil Code considering that the Pre-Subscription Agreement did not
provide for reciprocity of obligations; that the rights over the subject matter of
the rescission (capital assets and properties) had been acquired by a third
party (FLADC); that they did not commit a substantial and fundamental breach
of their agreement since they did not prevent the Tius from assuming the
positions of Vice-President and Treasurer of FLADC, and that the failure to
credit the 300,000 shares corresponding to the 1,902.30 square-meter property
covered by TCT No. 134066 (formerly 15587) was due to the refusal of the
Tius to pay the required transfer taxes to secure the approval of the SEC for
the property contribution and, thereafter, the issuance of title in FLADC's name.
They also argued that the liquidation of FLADC may not legally be ordered by
the appellate court even for so called "practical considerations" or even to
prevent "further squabbles and numerous litigations," since the same are not
valid grounds under the Corporation Code. Moreover, the Ongs bewailed the
failure of the CA to grant interest on their P70 million and P20 million advances
to FLADC and David S. Tiu, respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius,
on the other hand, contended that the rescission should have been limited to
the restitution of the parties' respective investments and not the liquidation of
FLADC based on the erroneous perception by the court that: the Masagana
Citimall was threatened with incompletion since FLADC was in financial
distress; that the Tius invited the Ongs to invest in FLADC to settle its P190
million loan from PNB; that they violated the Pre-Subscription Agreement when
it was the Lichaucos and not the Tius who executed the deed of assignment
over the 151 square-meter property commensurate to 49,800 shares in FLADC
thereby failing to pay the price for the said shares; that they did not turn over to
the Ongs the entire amount of FLADC funds; that they were diverting rentals
from lease contracts due to FLADC to their own MATTERCO account; that the
P70 million paid by the Ongs was an advance and not a premium on capital;

and that, by rescinding the Pre-Subscription Agreement, they wanted to

wrestle away the management of the mall and prevent the Ongs from enjoying
the profits of their P190 million investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the subject of the
instant motions), affirming the assailed decision of the Court of Appeals but
with the following modifications:
1. the P20 million loan extended by the Ongs to the Tius shall earn
interest at twelve percent (12%) per annum to be computed from the
time of judicial demand which is from April 23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall earn
interest at ten percent (10%) per annum to be computed from the date
of the FLADC Board Resolution which is June 19, 1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for their
property contribution, specifically, the 151 sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius violated their
respective obligations under the Pre-Subscription Agreement. The Ongs
prevented the Tius from assuming the positions of Vice-President and
Treasurer of the corporation. On the other hand, the Decision established that
the Tius failed to turn over FLADC funds to the Ongs and that the Tius diverted
rentals due to FLADC to their MATTERCO account. Consequently, it held that
rescission was not possible since both parties were in pari delicto. However,
this Court agreed with the Court of Appeals that the remedy of specific
performance, as espoused by the Ongs, was not practical and sound either
and would only lead to further "squabbles and numerous litigations" between
the parties.
On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a
Writ of Execution on the grounds that: (a) the SEC order had become
executory as early as September 11, 1998 pursuant to Sections 1 and 12, Rule
43 of the Rules of Court; (b) any further delay would be injurious to the rights of
the Tius since the case had been pending for more than six years; and (c) the
SEC no longer had quasi-judicial jurisdiction under RA 8799 (Securities
Regulation Code). The Ongs filed their opposition, contending that the
Decision dated February 1, 2002 was not yet final and executory; that no good
reason existed to issue a warrant of execution; and that, pursuant to Section
5.2 of RA 8799, the SEC retained jurisdiction over pending cases involving
intra-corporate disputes already submitted for final resolution upon the
effectivity of the said law.
Aside from their opposition to the Tius' Motion for Issuance of Writ of
Execution, the Ongs filed their own "Motion for Reconsideration; Alternatively,

Motion for Modification (of the February 1, 2002 Decision)" on March 15, 2002,
raising two main points: (a) that specific performance and not rescission was
the proper remedy under the premises; and (b) that, assuming rescission to be
proper, the subject decision of this Court should be modified to entitle movants
to their proportionate share in the mall.
On their first point (specific performance and not rescission was the proper
remedy), movants Ong argue that their alleged breach of the Pre-Subscription
Agreement was, at most, casual which did not justify the rescission of the
contract. They stress that providing appropriate offices for David S. Tiu and
Cely Y. Tiu as Vice-President and Treasurer, respectively, had no bearing on
their obligations under the Pre-Subscription Agreement since the said
obligation (to provide executive offices) pertained to FLADC itself. Such
obligation arose from the relations between the said officers and the
corporation and not any of the individual parties such as the Ongs. Likewise,
the alleged failure of the Ongs to credit shares of stock in favor of the Tius for
their property contributions also pertained to the corporation and not to the
Ongs. Just the same, it could not be done in view of the Tius' refusal to pay the
necessary transfer taxes which in turn resulted in the inability to secure SEC
approval for the property contributions and the issuance of a new TCT in the
name of FLADC.
Besides, according to the Ongs, the principal objective of both parties in
entering into the Pre-Subscription Agreement in 1994 was to raise the P190
million desperately needed for the payment of FLADC's loan to PNB. Hence, in
this light, the alleged failure to provide office space for the two corporate
officers was no more than an inconsequential infringement. For rescission to
be justified, the law requires that the breach of contract should be so
"substantial or fundamental" as to defeat the primary objective of the parties in
making the agreement. At any rate, the Ongs claim that it was the Tius who
were guilty of fundamental violations in failing to remit funds due to FLADC and
diverting the same to their MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that both parties
were guilty of violating the Pre-Subscription Agreement, neither of them could
resort to rescission under the principle of pari delicto. In addition, since the
cash and other contributions now sought to be returned already belong to
FLADC, an innocent third party, said remedy may no longer be availed of
under the law.
On their second point (assuming rescission to be proper, the Ongs should be
given their proportionate share of the mall), movants Ong vehemently take
exception to the second item in the dispositive portion of the questioned
Decision insofar as it decreed that whatever remains of the assets of FLADC
and the management thereof (after liquidation) shall be transferred to the Tius.
They point out that the mall itself, which would have been foreclosed by PNB if
not for their timely investment of P190 million in 1994 and which is now worth

about P1 billion mainly because of their efforts, should be included in any

partition and distribution. They (the Ongs) should not merely be given interest
on their capital investments. The said portion of our Decision, according to
them, amounted to the unjust enrichment of the Tius and ran contrary to our
own pronouncement that the act of the Tius in unilaterally rescinding the
agreement was "the height of ingratitude" and an attempt "to pull a fast one" as
it would prevent the Ongs from enjoying the fruits of their P190 million
investment in FLADC. It also contravenes this Court's assurance in the
questioned Decision that the Ongs and Tius "will have a bountiful return of their
respective investments derived from the profits of the corporation."
Willie Ong filed a separate "Motion for Partial Reconsideration" dated March 8,
2002, pointing out that there was no violation of the Pre-Subscription
Agreement on the part of the Ongs; that, after more than seven years since the
mall began its operations, rescission had become not only impractical but
would also adversely affect the rights of innocent parties; and that it would be
highly inequitable and unfair to simply return the P100 million investment of the
Ongs and give the remaining assets now amounting to about P1 billion to the
Tius.
The Tius, in their opposition to the Ongs' motion for reconsideration, counter
that the arguments therein are a mere re-hash of the contentions in the Ongs'
petition for review and previous motion for reconsideration of the Court of
Appeals' decision. The Tius compare the arguments in said pleadings to prove
that the Ongs do not raise new issues, and, based on well-settled
12
jurisprudence, the Ongs' present motion is therefore pro-forma and did not
prevent the Decision of this Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held oral
arguments on the respective positions of the parties. On February 27, 2003,
Dr. Willie Ong and the rest of the movants Ong filed their respective
memoranda. On February 28, 2003, the Tius submitted their memorandum.
We grant the Ongs' motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion for
reconsideration. In Philippine Consumers Foundation, Inc. vs. National
13
Telecommunications Commission, this Court, through then Chief Justice
Felix V. Makasiar, said that its members may and do change their minds, after
a re-study of the facts and the law, illuminated by a mutual exchange of
14
views. After a thorough re-examination of the case, we find that our Decision
of February 1, 2002 overlooked certain aspects which, if not corrected, will
cause extreme and irreparable damage and prejudice to the Ongs, FLADC and
its creditors.

The procedural rule on pro-forma motions pointed out by the Tius should not
be blindly applied to meritorious motions for reconsideration. As long as the
15
same adequately raises a valid ground (i.e., the decision or final order is
contrary to law), this Court has to evaluate the merits of the arguments to
prevent an unjust decision from attaining finality. In Security Bank and Trust
16
Company vs. Cuenca, we ruled that a motion for reconsideration is not proforma for the reason alone that it reiterates the arguments earlier passed upon
and rejected by the appellate court. We explained there that a movant may
raise the same arguments, if only to convince this Court that its ruling was
erroneous. Moreover, the rule (that a motion is pro-forma if it only repeats the
arguments in the previous pleadings) will not apply if said arguments were not
squarely passed upon and answered in the decision sought to be
reconsidered. In the case at bar, no ruling was made on some of the petitioner
Ongs' arguments. For instance, no clear ruling was made on why an order
distributing corporate assets and property to the stockholders would not violate
the statutory preconditions for corporate dissolution or decrease of authorized
capital stock. Thus, it would serve the ends of justice to entertain the subject
motion for reconsideration since some important issues therein, although mere
repetitions, were not considered or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally rescind the
Pre-Subscription Agreement. We rule that they could not.
FLADC was originally incorporated with an authorized capital stock of 500,000
shares with the Tius owning 450,200 shares representing the paid-up capital.
When the Tius invited the Ongs to invest in FLADC as stockholders, an
increase of the authorized capital stock became necessary to give each group
equal (50-50) shareholdings as agreed upon in the Pre-Subscription
Agreement. The authorized capital stock was thus increased from 500,000
shares to 2,000,000 shares with a par value of P100 each, with the Ongs
subscribing to 1,000,000 shares and the Tius to 549,800 more shares in
addition to their 450,200 shares to complete 1,000,000 shares. Thus, the
subject matter of the contract was the 1,000,000 unissued shares of FLADC
stock allocated to the Ongs. Since these were unissued shares, the parties'
Pre-Subscription Agreement was in fact a subscription contract as defined
under Section 60, Title VII of the Corporation Code:
Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title, notwithstanding the fact
that the parties refer to it as a purchase or some other contract (Italics
supplied).
A subscription contract necessarily involves the corporation as one of the
contracting parties since the subject matter of the transaction is property
owned by the corporation its shares of stock. Thus, the subscription contract
(denominated by the parties as a Pre-Subscription Agreement) whereby the

Ongs invested P100 million for 1,000,000 shares of stock was, from the
viewpoint of the law, one between the Ongs and FLADC, not between the
Ongs and the Tius. Otherwise stated, the Tius did not contract in their personal
capacities with the Ongs since they were not selling any of their own shares to
them. It was FLADC that did.
Considering therefore that the real contracting parties to the subscription
agreement were FLADC and the Ongs alone, a civil case for rescission on the
ground of breach of contract filed by the Tius in their personal capacities will
not prosper. Assuming it had valid reasons to do so, only FLADC (and certainly
not the Tius) had the legal personality to file suit rescinding the subscription
agreement with the Ongs inasmuch as it was the real party in interest therein.
Article 1311 of the Civil Code provides that "contracts take effect only between
the parties, their assigns and heirs" Therefore, a party who has not taken
part in the transaction cannot sue or be sued for performance or for
cancellation thereof, unless he shows that he has a real interest affected
17
thereby.
In their February 28, 2003 Memorandum, the Tius claim that there are two
contracts embodied in the Pre-Subscription Agreement: a shareholder's
agreement between the Tius and the Ongs defining and governing their
relationship and a subscription contract between the Tius, the Ongs and
FLADC regarding the subscription of the parties to the corporation. They point
out that these two component parts form one whole agreement and that their
terms and conditions are intrinsically related and dependent on each other.
Thus, the breach of the shareholders' agreement, which was allegedly the
consideration for the subscription contract, was also a breach of the latter.
Aside from the fact that this is an entirely new angle never raised in any of their
previous pleadings until after the oral arguments on January 29, 2003, we find
this argument too strained for comfort. It is obviously intended to remedy and
cover up the Tius' lack of legal personality to rescind an agreement in which
they were personally not parties-in-interest. Assuming arguendo that there
were two "sub-agreements" embodied in the Pre-Subscription Agreement, this
Court fails to see how the shareholders agreement between the Ongs and Tius
can, within the bounds of reason, be interpreted as the consideration of the
subscription contract between FLADC and the Ongs. There was nothing in the
Pre-Subscription Agreement even remotely suggesting such alleged
interdependence. Be that as it may, however, the Tius are nevertheless not the
proper parties to raise this point because they were not parties to the
subscription contract between FLADC and the Ongs. Thus, they are not in a
position to claim that the shareholders agreement between them and the Ongs
was what induced FLADC and the Ongs to enter into the subscription contract.
It is the Ongs alone who can say that. Though FLADC was represented by the
Tius in the subscription contract, FLADC had a separate juridical personality
from the Tius. The case before us does not warrant piercing the veil of

corporate fiction since there is no proof that the corporation is being used "as a
18
cloak or cover for fraud or illegality, or to work injustice."
The Tius also argue that, since the Ongs represent FLADC as its
management, breach by the Ongs is breach by FLADC. This must also fail
because such an argument disregards the separate juridical personality of
FLADC.
The Tius allege that they were prevented from participating in the management
of the corporation. There is evidence that the Ongs did prevent the rightfully
elected Treasurer, Cely Tiu, from exercising her function as such. The records
show that the President, Wilson Ong, supervised the collection and receipt of
19
rentals in the Masagana Citimall; that he ordered the same to be deposited in
20
21
the bank; and that he held on to the cash and properties of the corporation.
Section 25 of the Corporation Code prohibits the President from acting
concurrently as Treasurer of the corporation. The rationale behind the
provision is to ensure the effective monitoring of each officer's separate
functions.
However, although the Tius were adversely affected by the Ongs'
unwillingness to let them assume their positions, rescission due to breach of
contract is definitely the wrong remedy for their personal grievances. The
Corporation Code, SEC rules and even the Rules of Court provide for
appropriate and adequate intra-corporate remedies, other than
rescission, in situations like this. Rescission is certainly not one of them,
specially if the party asking for it has no legal personality to do so and the
requirements of the law therefor have not been met. A contrary doctrine will
tread on extremely dangerous ground because it will allow just any
stockholder, for just about any real or imagined offense, to demand rescission
of his subscription and call for the distribution of some part of the corporate
assets to him without complying with the requirements of the Corporation
Code.
Hence, the Tius, in their personal capacities, cannot seek the ultimate and
extraordinary remedy of rescission of the subject agreement based on a less
than substantial breach of subscription contract. Not only are they not parties
to the subscription contract between the Ongs and FLADC; they also have
other available and effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius possess the
legal standing to sue for rescission based on breach of contract, said action will
nevertheless still not prosper since rescission will violate the Trust Fund
Doctrine and the procedures for the valid distribution of assets and property
under the Corporation Code.

The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of
22
Philippine Trust Co. vs. Rivera, provides that subscriptions to the capital
stock of a corporation constitute a fund to which the creditors have a right to
23
look for the satisfaction of their claims. This doctrine is the underlying
principle in the procedure for the distribution of capital assets, embodied in the
Corporation Code, which allows the distribution of corporate capital only in
three instances: (1) amendment of the Articles of Incorporation to reduce the
24
authorized capital stock,
(2) purchase of redeemable shares by the
25
corporation, regardless of the existence of unrestricted retained earnings,
and (3) dissolution and eventual liquidation of the corporation. Furthermore, the
doctrine is articulated in Section 41 on the power of a corporation to acquire its
26
own shares and in Section 122 on the prohibition against the distribution of
corporate assets and property unless the stringent requirements therefor are
27
complied with.
The distribution of corporate assets and property cannot be made to depend
on the whims and caprices of the stockholders, officers or directors of the
corporation, or even, for that matter, on the earnest desire of the court a quo
"to prevent further squabbles and future litigations" unless the indispensable
conditions and procedures for the protection of corporate creditors are
followed. Otherwise, the "corporate peace" laudably hoped for by the court will
remain nothing but a dream because this time, it will be the creditors' turn to
engage in "squabbles and litigations" should the court order an unlawful
distribution in blatant disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will
effectively result in the unauthorized distribution of the capital assets and
property of the corporation, thereby violating the Trust Fund Doctrine and the
Corporation Code, since rescission of a subscription agreement is not one of
the instances when distribution of capital assets and property of the
corporation is allowed.
Contrary to the Tius' allegation, rescission will, in the final analysis, result in the
premature liquidation of the corporation without the benefit of prior dissolution
28
in accordance with Sections 117, 118, 119 and 120 of the Corporation Code.
The Tius maintain that rescinding the subscription contract is not synonymous
to corporate liquidation because all rescission will entail would be the simple
restoration of the status quo ante and a return to the two groups of their cash
and property contributions. We wish it were that simple. Very noticeable is the
fact that the Tius do not explain why rescission in the instant case will not
effectively result in liquidation. The Tius merely refer in cavalier fashion to the
end-result of rescission (which incidentally is 100% favorable to them) but turn
a blind eye to its unfair, inequitable and disastrous effect on the corporation, its
creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that rescission
of the agreement will not result in an unauthorized liquidation of the corporation

because their case is actually a petition to decrease capital stock pursuant to

Section 38 of the Corporation Code. Section 122 of the law provides that
"(e)xcept by decrease of capital stock, no corporation shall distribute any of
its assets or property except upon lawful dissolution and after payment of all its
debts and liabilities." The Tius claim that their case for rescission, being a
petition to decrease capital stock, does not violate the liquidation procedures
under our laws. All that needs to be done, according to them, is for this Court
to order (1) FLADC to file with the SEC a petition to issue a certificate of
decrease of capital stock and (2) the SEC to approve said decrease. This new
argument has no merit.
The Tius' case for rescission cannot validly be deemed a petition to decrease
capital stock because such action never complied with the formal requirements
for decrease of capital stock under Section 33 of the Corporation Code. No
majority vote of the board of directors was ever taken. Neither was there any
stockholders meeting at which the approval of stockholders owning at least
two-thirds of the outstanding capital stock was secured. There was no revised
treasurer's affidavit and no proof that said decrease will not prejudice the
creditors' rights. On the contrary, all their pleadings contained were alleged
acts of violations by the Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs of the
corporation to compel FLADC to file at the SEC a petition for the issuance of a
certificate of decrease of stock. Decreasing a corporation's authorized capital
stock is an amendment of the Articles of Incorporation. It is a decision that only
the stockholders and the directors can make, considering that they are the
contracting parties thereto. In this case, the Tius are actually not just asking for
a review of the legality and fairness of a corporate decision. They want this
Court to make a corporate decision for FLADC. We decline to intervene and
order corporate structural changes not voluntarily agreed upon by its
stockholders and directors.
Truth to tell, a judicial order to decrease capital stock without the assent of
FLADC's directors and stockholders is a violation of the "business judgment
rule" which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of
directors are binding upon the corporation and courts will not interfere
unless such contracts are so unconscionable and oppressive as to
amount to wanton destruction to the rights of the minority, as when
plaintiffs aver that the defendants (members of the board), have
concluded a transaction among themselves as will result in serious
29
injury to the plaintiffs stockholders.
The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an
esteemed author in corporate law, thus:

Courts and other tribunals are wont to override the business judgment
of the board mainly because, courts are not in the business of
business, and the laissez faire rule or the free enterprise system
prevailing in our social and economic set-up dictates that it is better for
the State and its organs to leave business to the businessmen;
especially so, when courts are ill-equipped to make business
decisions. More importantly, the social contract in the corporate family
to decide the course of the corporate business has been vested in the
30
board and not with courts.
Apparently, the Tius do not realize the illegal consequences of seeking
rescission and control of the corporation to the exclusion of the Ongs. Such an
act infringes on the law on reduction of capital stock. Ordering the return and
distribution of the Ongs' capital contribution without dissolving the corporation
or decreasing its authorized capital stock is not only against the law but is also
prejudicial to corporate creditors who enjoy absolute priority of payment over
and above any individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is not
difficult to understand. If rescission is denied, will injustice be inflicted on any of
the parties? The answer is no because the financial interests of both the Tius
and the Ongs will remain intact and safe within FLADC. On the other hand, if
rescission is granted, will any of the parties suffer an injustice? Definitely yes
because the Ongs will find themselves out in the streets with nothing but the
money they had in 1994 while the Tius will not only enjoy a windfall estimated
31
to be anywhere from P450 million to P900 million but will also take over an
extremely profitable business without much effort at all.
Another very important point follows. The Court of Appeals and, later on, our
Decision dated February 1, 2002, stated that both groups were in pari delicto,
meaning, that both the Tius and the Ongs committed breaches of the PreSubscription Agreement. This may be true to a certain extent but, judging from
the comparative gravity of the acts separately committed by each group, we
find that the Ongs' acts were relatively tame vis--vis those committed by the
Tius in not surrendering FLADC funds to the corporation and diverting
corporate income to their own MATTERCO account. The Ongs were right in
not issuing to the Tius the shares corresponding to the four-story building and
the 1,902.30 square-meter lot because no title for it could be issued in
FLADC's name, owing to the Tius' refusal to pay the transfer taxes. And as far
as the 151 square-meter lot was concerned, why should FLADC issue
additional shares to the Tius for property already owned by the corporation and
which, in the final analysis, was already factored into the shareholdings of the
Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court of
Appeals, to "pull a fast one" on the Ongs because that was where the problem
precisely started. It is clear that, when the finances of FLADC improved

considerably after the equity infusion of the Ongs, the Tius started planning to
take over the corporation again and exclude the Ongs from it. It appears that
the Tius' refusal to pay transfer taxes might not have really been at all
unintentional because, by failing to pay that relatively small amount which they
could easily afford, the Tius should have expected that they were not going to
be given the corresponding shares. It was, from every angle, the perfect
excuse for blackballing the Ongs. In other words, the Tius created a problem
then used that same problem as their pretext for showing their partners the
door. In the process, they stood to be rewarded with a bonanza of anywhere
between P450 million to P900 million in assets (from an investment of only P45
million which was nearly foreclosed by PNB), to the extreme and irreparable
damage of the Ongs, FLADC and its creditors.

SO ORDERED.

After all is said and done, no one can close his eyes to the fact that the
Masagana Citimall would not be what it has become today were it not for the
timely infusion of P190 million by the Ongs in 1994. There are no ifs or buts
about it.

ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC.,

petitioner,
vs.
SECURITIES & EXCHANGE COMMISSION, respondent.

Without the Ongs, the Tius would have lost everything they originally invested
in said mall. If only for this and the fact that this Resolution can truly pave the
way for both groups to enjoy the fruits of their investments assuming good
faith and honest intentions we cannot allow the rescission of the subject
subscription agreement. The Ongs' shortcomings were far from serious and
certainly less than substantial; they were in fact remediable and correctable
under the law. It would be totally against all rules of justice, fairness and equity
to deprive the Ongs of their interests on petty and tenuous grounds.

Gamboa and Gamboa for petitioner.

Office of the Solicitor General for respondent.

WHEREFORE, the motion for reconsideration, dated March 15, 2002, of

petitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong,
Willie Ong and Julie Ong Alonzo and the motion for partial reconsideration,
dated March 15, 2002, of petitioner Willie Ong are hereby GRANTED. The
Petition for Confirmation of the Rescission of the Pre-Subscription Agreement
docketed as SEC Case No. 02-96-5269 is hereby DISMISSED for lack of
merit. The unilateral rescission by the Tius of the subject Pre-Subscription
Agreement, dated August 15, 1994, is hereby declared as null and void.
The motion for the issuance of a writ of execution, dated March 15, 2002, of
petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence
Y. Tiu, John Yu and Lourdes C. Tiu is hereby DENIED for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002, affirming with
modification the decision of the Court of Appeals, dated October 5, 1999, and
the SEC en banc, dated September 11, 1998, is hereby REVERSED.
Costs against the petitioner Tius.

Bellosillo, (Chairman), Quisumbing, and Callejo, Sr., JJ., concur.

G.R. No. L-23606

July 29, 1968

SANCHEZ, J.:
To the question May a corporation extend its life by amendment of its
articles of incorporation effected during the three-year statutory period for
liquidation when its original term of existence had already expired? the
answer of the Securities and Exchange Commissioner was in the negative.
Offshoot is this appeal.
That problem emerged out of the following controlling facts:
Petitioner Alhambra Cigar and Cigarette Manufacturing Company, Inc.
(hereinafter referred to simply as Alhambra) was duly incorporated under
Philippine laws on January 15, 1912. By its corporate articles it was to exist for
fifty (50) years from incorporation. Its term of existence expired on January 15,
1962. On that date, it ceased transacting business, entered into a state of
liquidation.
Thereafter, a new corporation. Alhambra Industries, Inc. was formed to
carry on the business of Alhambra.
On May 1, 1962, Alhambra's stockholders, by resolution named Angel S.
Gamboa trustee to take charge of its liquidation.
On June 20, 1963 within Alhambra's three-year statutory period for
liquidation - Republic Act 3531 was enacted into law. It amended Section 18 of

the Corporation Law; it empowered domestic private corporations to extend

their corporate life beyond the period fixed by the articles of incorporation for a
term not to exceed fifty years in any one instance. Previous to Republic Act
3531, the maximum non-extendible term of such corporations was fifty years.
On July 15, 1963, at a special meeting, Alhambra's board of directors resolved
to amend paragraph "Fourth" of its articles of incorporation to extend its
corporate life for an additional fifty years, or a total of 100 years from its
incorporation.

directors or trustees and ... by the vote or written assent of the stockholders
representing at least two-thirds of the subscribed capital stock ... "
But prior to amendment by Republic Act 3531, an explicit prohibition existed in
Section 18, thus:
... Provided, however, That the life of said corporation shall not be
extended by said amendment beyond the time fixed in the original
articles: ...

On August 26, 1963, Alhambra's stockholders, representing more than twothirds of its subscribed capital stock, voted to approve the foregoing resolution.
The "Fourth" paragraph of Alhambra's articles of incorporation was thus altered
to read:

This was displaced by Republic Act 3531 which enfranchises all private
corporations to extend their corporate existence. Thus incorporated into the
structure of Section 18 are the following:

FOURTH. That the term for which said corporation is to exist is fifty
(50) years from and after the date of incorporation, and for an
additional period of fifty (50) years thereafter.

... Provided, however, That should the amendment consist in

extending the corporate life, the extension shall not exceed fifty years
in any one instance: Provided, further, That the original articles, and
amended articles together shall contain all provisions required by law
to be set out in the articles of incorporation: ...

On October 28, 1963, Alhambra's articles of incorporation as so amended

certified correct by its president and secretary and a majority of its board of
directors, were filed with respondent Securities and Exchange Commission
(SEC).
On November 18, 1963, SEC, however, returned said amended articles of
incorporation to Alhambra's counsel with the ruling that Republic Act 3531
"which took effect only on June 20, 1963, cannot be availed of by the said
corporation, for the reason that its term of existence had already expired when
the said law took effect in short, said law has no retroactive effect."
On December 3, 1963, Alhambra's counsel sought reconsideration of SEC's
ruling aforesaid, refiled the amended articles of incorporation.
On September 8, 1964, SEC, after a conference hearing, issued an order
denying the reconsideration sought.
Alhambra now invokes the jurisdiction of this Court to overturn the conclusion
1
below.
1. Alhambra relies on Republic Act 3531, which amended Section 18 of the
Corporation Law. Well it is to take note of the old and the new statutes as they
are framed. Section 18, prior to and after its modification by Republic Act 3531,
covers the subject of amendment of the articles of incorporation of private
corporations. A provision thereof which remains unaltered is that a corporation
may amend its articles of incorporation "by a majority vote of its board of

As we look in retrospect at the facts, we find these: From July 15 to October

28, 1963, when Alhambra made its attempt to extend its corporate existence,
its original term of fifty years had already expired (January 15, 1962); it was in
the midst of the three-year grace period statutorily fixed in Section 77 of the
Corporation Law, thus: .
SEC. 77. Every corporation whose charter expires by its own limitation
or is annulled by forfeiture or otherwise, or whose corporate existence
for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three years after
the time when it would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and of enabling it
gradually to settle and close its affairs, to dispose of and convey its
property and to divide its capital stock, but not for the purpose of
2
continuing the business for which it was established.
Plain from the language of the provision is its meaning: continuance of a
"dissolved" corporation as a body corporate for three years has for its purpose
the final closure of its affairs, and no other; the corporation is specifically
enjoined from "continuing the business for which it was established". The
liquidation of the corporation's affairs set forth in Section 77 became necessary
precisely because its life had ended. For this reason alone, the corporate
existence and juridical personality of that corporation to do business may no
longer be extended.

Worth bearing in mind, at this juncture, is the basic development of corporation

law.
The common law rule, at the beginning, was rigid and inflexible in that upon its
dissolution, a corporation became legally dead for all purposes. Statutory
authorizations had to be provided for its continuance after dissolution "for
3
limited and specified purposes incident to complete liquidation of its affairs".
Thus, the moment a corporation's right to exist as an "artificial person" ceases,
its corporate powers are terminated "just as the powers of a natural person to
4
take part in mundane affairs cease to exist upon his death". There is nothing
left but to conduct, as it were, the settlement of the estate of a deceased
juridical person.
2. Republic Act 3531, amending Section 18 of the Corporation Law, is silent, it
is true, as to when such act of extension may be made. But even with a
superficial knowledge of corporate principles, it does not take much effort to
reach a correct conclusion. For, implicit in Section 77 heretofore quoted is that
the privilege given to prolong corporate life under the amendment must be
exercised before the expiry of the term fixed in the articles of incorporation.
Silence of the law on the matter is not hard to understand. Specificity is not
really necessary. The authority to prolong corporate life was inserted by
Republic Act 3531 into a section of the law that deals with the power of a
corporation to amend its articles of incorporation. (For, the manner of
prolongation is through an amendment of the articles.) And it should be clearly
evident that under Section 77 no corporation in a state of liquidation can act in
any way, much less amend its articles, "for the purpose of continuing the
business for which it was established".
All these dilute Alhambra's position that it could revivify its corporate life simply
because when it attempted to do so, Alhambra was still in the process of
liquidation. It is surely impermissible for us to stretch the law that merely
empowers a corporation to act in liquidation to inject therein the power to
extend its corporate existence.
3. Not that we are alone in this view. Fletcher has written: "Since the privilege
of extension is purely statutory, all of the statutory conditions precedent must
be complied with in order that the extension may be effectuated. And, generally
these conditions must be complied with, and the steps necessary to effect the
extension must be taken, during the life of the corporation, and before the
expiration of the term of existence as original fixed by its charter or the general
law, since, as a rule, the corporation is ipso facto dissolved as soon as that
time expires. So where the extension is by amendment of the articles of
incorporation, the amendment must be adopted before that time. And, similarly,
the filing and recording of a certificate of extension after that time cannot relate
back to the date of the passage of a resolution by the stockholders in favor of
the extension so as to save the life of the corporation. The contrary is true,

however, and the doctrine of relation will apply, where the delay is due to the
neglect of the officer with whom the certificate is required to be filed, or to a
wrongful refusal on his part to receive it. And statutes in some states
specifically provide that a renewal may be had within a specified time before or
5
after the time fixed for the termination of the corporate existence".
The logic of this position is well expressed in a foursquare case decided by the
6
Court of Appeals of Kentucky. There, pronouncement was made as follows:
... But section 561 (section 2147) provides that, when any corporation
expires by the terms of its articles of incorporation, it may be thereafter
continued to act for the purpose of closing up its business, but for no
other purpose. The corporate life of the Home Building Association
expired on May 3, 1905. After that date, by the mandate of the statute,
it could continue to act for the purpose of closing up its business, but
for no other purpose. The proposed amendment was not made until
January 16, 1908, or nearly three years after the corporation expired
by the terms of the articles of incorporation. When the corporate life of
the corporation was ended, there was nothing to extend. Here it was
proposed nearly three years after the corporate life of the association
had expired to revivify the dead body, and to make that relate back
some two years and eight months. In other words, the association for
two years and eight months had only existed for the purpose of
winding up its business, and, after this length of time, it was proposed
to revivify it and make it a live corporation for the two years and eight
months daring which it had not been such.
The law gives a certain length of time for the filing of records in this
court, and provides that the time may be extended by the court, but
under this provision it has uniformly been held that when the time was
expired, there is nothing to extend, and that the appeal must be
dismissed... So, when the articles of a corporation have expired, it is
too late to adopt an amendment extending the life of a corporation; for,
the corporation having expired, this is in effect to create a new
7
corporation ..."
8

True it is, that the Alabama Supreme Court has stated in one case. that a
corporation empowered by statute to renew its corporate existence may do so
even after the expiration of its corporate life, provided renewal is taken
advantage of within the extended statutory period for purposes of liquidation.
That ruling, however, is inherently weak as persuasive authority for the
situation at bar for at least two reasons: First. That case was a suit for
mandamus to compel a former corporate officer to turn over books and records
that came into his possession and control by virtue of his office. It was there
held that such officer was obliged to surrender his books and records even if
the corporation had already expired. The holding on the continued existence of
the corporation was a mere dictum. Second. Alabama's law is different.

Corporations in that state were authorized not only to extend but also to renew
their corporate existence.That very case defined the word "renew" as follows;
"To make new again; to restore to freshness; to make new spiritually; to
regenerate; to begin again; to recommence; to resume; to restore to existence,
to revive; to re-establish; to recreate; to replace; to grant or obtain an extension
of Webster's New International Dict.; 34 Cyc. 1330; Carter v. Brooklyn Life Ins.
9
Co., 110 N.Y. 15, 21, 22, 17 N.E. 396; 54 C.J. 379. Sec".
On this point, we again draw from Fletcher: "There is a broad distinction
between the extension of a charter and the grant of a new one. To renew a
charter is to revive a charter which has expired, or, in other words, "to give a
new existence to one which has been forfeited, or which has lost its vitality by
lapse of time". To "extend" a charter is "to increase the time for the existence of
10
one which would otherwise reach its limit at an earlier period". Nowhere in
our statute Section 18, Corporation Law, as amended by Republic Act 3531
do we find the word "renew" in reference to the authority given to
corporations to protract their lives. Our law limits itself to extension of corporate
existence. And, as so understood, extension may be made only before the
term provided in the corporate charter expires.
11

Alhambra draws attention to another case which declares that until the end of
the extended period for liquidation, a dissolved corporation "does not become
an extinguished entity". But this statement was obviously lifted out of context.
That case dissected the question whether or not suits can be commenced by
or against a corporation within its liquidation period. Which was answered in
the affirmative. For, the corporation still exists for the settlement of its affairs.
12

People, ex rel. vs. Green, also invoked by Alhambra, is as unavailing. There,

although the corporation amended its articles to extend its existence at a time
when it had no legal authority yet, it adopted the amended articles later on
when it had the power to extend its life and during its original term when it
could amend its articles.
The foregoing notwithstanding, Alhambra falls back on the contention that its
case is arguably within the purview of the law. It says that before cessation of
its corporate life, it could not have extended the same, for the simple reason
that Republic Act 3531 had not then become law. It must be remembered that
Republic Act 3531 took effect on June 20, 1963, while the original term of
Alhambra's existence expired before that date on January 15, 1962. The
mischief that flows from this theory is at once apparent. It would certainly open
the gates for all defunct corporations whose charters have expired even
long before Republic Act 3531 came into being to resuscitate their corporate
existence.
4. Alhambra brings into argument Republic Act 1932, which amends Section
196 of the Insurance Act, now reading as follows: 1wph1.t

SEC. 196. Any provision of law to the contrary notwithstanding, every

domestic life insurance corporation, formed for a limited period under
the provisions of its articles of incorporation, may extend its corporate
existence for a period not exceeding fifty years in any one instance by
amendment to its articles of incorporation on or before the expiration of
the term so fixed in said articles ...
To be observed is that the foregoing statute unlike Republic Act 3531
expressly authorizes domestic insurance corporations to extend their corporate
existence "on or before the expiration of the term" fixed in their articles of
incorporation. Republic Act 1932 was approved on June 22, 1957, long before
the passage of Republic Act 3531 in 1963. Congress, Alhambra points out,
must have been aware of Republic Act 1932 when it passed Republic Act
3531. Since the phrase "on or before", etc., was omitted in Republic Act 3531,
which contains no similar limitation, it follows, according to Alhambra, that it is
not necessary to extend corporate existence on or before the expiration of its
original term.
That Republic Act 3531 stands mute as to when extention of corporate
existence may be made, assumes no relevance. We have already said, in the
face of a familiar precept, that a defunct corporation is bereft of any legal
faculty not otherwise expressly sanctioned by law.
Illuminating here is the explanatory note of H.B. 1774, later Republic Act 3531
now in dispute. Its first paragraph states that "Republic Act No. 1932 allows
the automatic extension of the corporate existence of domestic life insurance
corporations upon amendment of their articles of incorporation on or before the
expiration of the terms fixed by said articles". The succeeding lines are
decisive: "This is a good law, a sane and sound one. There appears to be no
13
valid reason why it should not be made to apply to other private corporations.
The situation here presented is not one where the law under consideration is
ambiguous, where courts have to put in harness extrinsic aids such as a look
at another statute to disentangle doubts. It is an elementary rule in legal
hermeneutics that where the terms of the law are clear, no statutory
construction may be permitted. Upon the basic conceptual scheme under
which corporations operate, and with Section 77 of the Corporation Law
particularly in mind, we find no vagueness in Section 18, as amended by
Republic Act 3531. As we view it, by directing attention to Republic Act 1932,
Alhambra would seek to create obscurity in the law; and, with that, ask of us a
ruling that such obscurity be explained. This, we dare say, cannot be done.
The pari materia rule of statutory construction, in fact, commands that statutes
14
must be harmonized with each other. So harmonizing, the conclusion is clear
that Section 18 of the Corporation Law, as amended by Republic Act 3531 in
reference to extensions of corporate existence, is to be read in the same light
as Republic Act 1932. Which means that domestic corporations in general, as

with domestic insurance companies, can extend corporate existence only on or

before the expiration of the term fixed in their charters.
5. Alhambra pleads for munificence in interpretation, one which brushes
technicalities aside. Bases for this posture are that Republic Act 3531 is a
remedial statute, and that extension of corporate life is beneficial to the
economy.
Alhambra's stance does not induce assent. Expansive construction is possible
only when there is something to expand. At the time of the passage of
Republic Act 3531, Alhambra's corporate life had already expired. It had
overstepped the limits of its limited existence. No life there is to prolong.
Besides, a new corporation Alhambra Industries, Inc., with but slight change
15
in stockholdings has already been established. Its purpose is to carry on,
16
and it actually does carry on, the business of the dissolved entity. The
beneficial-effects argument is off the mark.
The way the whole case shapes up then, the only possible drawbacks of
Alhambra might be that, instead of the new corporation (Alhambra Industries,
Inc.) being written off, the old one (Alhambra Cigar & Cigarette Manufacturing
Company, Inc.) has to be wound up; and that the old corporate name cannot
17
be retained fully in its exact form. What is important though is that the word
Alhambra, the name that counts [it has goodwill], remains.
FOR THE REASONS GIVEN, the ruling of the Securities and Exchange
Commission of November 18, 1963, and its order of September 8, 1964, both
here under review, are hereby affirmed.
Costs against petitioner Alhambra Cigar & Cigarette Manufacturing Company,
Inc. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Angeles
and Fernando, JJ., concur.

G.R. No. 63201

May 27, 1992

PHILIPPINE NATIONAL BANK, petitioner,

vs.
THE COURT OF FIRST INSTANCE OF RIZAL, PASIG BRANCH XXI,
PRESIDED BY JUDGE GREGORIO G. PINEDA, CHUNG SIONG PEK @
BONIFACIO CHUNG SIONG PEK AND VICTORIA CHING GENG TY @
VICTORIA CHENG GENG TY, and THE REGISTER OF DEEDS OF RIZAL,
PASIG, METRO MANILA AND/OR HIS DEPUTIES AND AGENTS,
respondents.
MEDIALDEA, J.:
This is a petition for certiorari under Rule 65 of the Rules of Court seeking to
annul and set aside the orders of respondent Court of First Instance of Rizal,
Pasig, Branch 21 (now Regional Trial Court) dated April 22, 1982, September
14, 1982 and January 12, 1983 in LRC Case No. R-2744 on the ground that
they had been issued without or in excess of jurisdiction and with grave abuse
of discretion.
The antecedent facts of this case are as follows:
Private respondents are the registered owners of three parcels of land in
Pasig, Metro Manila covered by OCT No. 853, TCT Nos. 32843 and 32897 of
the Registry of Deeds of Rizal.
On March 1, 1954, private respondents entered into a contract of lease with
Philippine Blooming Mills, Co., Inc., (PBM for brevity) whereby the letter shall
lease the aforementioned parcels of land as factory site. PBM was duly
organized and incorporated on January 19, 1952 with a corporate term of
twenty-five (25) years. This leasehold right of PBM covering the parcels of land
was duly annotated at the back of the above stated certificates of title as Entry
No. 9367/T-No. 32843.
The contract of lease provides that the term of the lease is for twenty years
beginning from the date of the contract and "is extendable for another term of
twenty years at the option of the LESSEE should its term of existence be

extended in accordance with law." (p. 76, Rollo). The contract also states that
the lessee agrees to "use the property as factory site and for that purpose to
construct whatever buildings or improvements may be necessary or convenient
and/or . . . for any purpose it may deem fit; and before the termination of the
lease to remove all such buildings and improvements" (pp. 76-77 Rollo).
In accordance with the contract, PBM introduced on the land, buildings,
machineries and other useful improvements. These constructions and
improvements were registered with the Registry of Deeds of Rizal and
annotated at the back of the respondents' certificates of title as Entry No.
85213/T-No. 43338.
On October 11, 1963, PBM executed in favor of Philippine National Bank (PNB
for brevity), petitioner herein, a deed of assignment, conveying and transferring
all its rights and interests under the contract of lease which it executed with
private respondents. The assignment was for and in consideration of the loans
granted by PNB to PBM. The deed of assignment was registered and
annotated at the back of the private respondents' certificates of title as Entry
No. 85215/T-No. 32843.
On November 6, 1963 and December 23, 1963 respectively, PBM executed in
favor of PNB a real estate mortgage for a loan of P100,000.00 and an
addendum to real estate mortgage for another loan of P1,590,000.00, covering
all the improvements constructed by PBM on the leased premises. These
mortgages were registered and annotated at the back of respondents'
certificates as Entry No. 85214/T-No. 43338 and Entry No. 870971/T-No.
32843, respectively.
PBM filed a petition for registration of improvements in the titles of real property
owned by private respondents docketed as Case No. 6530.
On October 7, 1981, private respondents filed a motion in the same
proceedings which was given a different case number to wit, LRC Case No.
R-2744, because of the payment of filing fees for the motion. The motion
sought to cancel the annotations on respondents' certificates of title pertaining
to the assignment by PBM to PNB of the former's leasehold rights, inclusion of
improvements and the real estate mortgages made by PBM in favor of PNB,
on the ground that the contract of lease entered into between PBM and
respondents-movants had already expired by the failure of PBM and/or its
assignee to exercise the option to renew the second 20-year lease
commencing on March 1, 1974 and also by the failure of PBM to extend its
corporate existence in accordance with law. The motion also states that since
PBM failed to remove its improvements on the leased premises before the
expiration of the contract of lease, such improvements shall accrue to
respondents as owners of the land.

On April 22, 1982, respondent court issued an order directing the cancellation
of the inscriptions on respondents' certificates of title. The dispositive portion of
the order provides:
WHEREFORE, the Register of Deeds having jurisdiction over
the movant's land Certificates of Title Nos. 853, 32843 and
32897 is hereby ordered, upon the payment of the
corresponding
fees,
to
cancel
therein
memoranda/inscriptions/entries Nos. 85213/T-No. 43338,
85215/T-No. 32843, 85214/T-No. 43338 and 87097/T-No.
32843.
SO ORDERED. (pp. 147-148, Rollo)
Petitioner PNB filed a motion for reconsideration of the above order of the
respondent court but the latter denied it on June 28, 1982.
On August 25, 1982, private respondents filed a motion for entry of final
judgment and issuance of a writ of execution of the order of April 22, 1982.
On September 14, 1982, respondent court granted the aforesaid motion for
entry of final judgment and ordered the Register of Deeds of Pasig, Rizal to
cancel the entries on respondents' certificates of title stated in the order of April
22, 1982.
Petitioner PNB filed an omnibus motion to set aside the entry of judgment as
ordered by the respondent court on the ground that it has no prior notice or
knowledge of the order of respondent court dated June 28, 1982 which denied
its motion for reconsideration of the order of April 22, 1982 and that while there
was a certification from the Bureau of Posts that three registry notices were
sent to petitioner's counsel, there was no allegation or certification whatsoever
that said notices were actually received by the addressee.
On January 12, 1983, the respondent court denied the omnibus motion.
Hence, this petition.
Petitioner alleges that respondent court acted capriciously and arbitrarily in
issuing the orders of September 14, 1982 and January 12, 1983 which
considered its previous order of April 22, 1982 as having become final on the
ground that it had no notice or knowledge that the order of June 28, 1982
denying its motion for reconsideration was issued; that the notices of registered
mail allegedly containing the order of June 28, 1982 were not received by
petitioner's counsel of record, and that the certification of the Bureau of Posts
refers only to the fact that registry notices were sent, and not to the fact that
the notices were actually received by the addressee.

In resolving this matter, the respondent court stated in the questioned order of
January 12, 1983 as follows:

regularly performed (Aportadera, Sr. v. Court of Appeals, G.R. No. 41358,

March 16, 1988, 158 SCRA 695).

The respondent PNB filed a motion of May 20, 1982 to set

aside the Order of April 22, 1982. This was denied by the
Order of June 28, 1982. Then the movants filed a motion of
August 25, 1982 for entry of judgment, based on the
postmaster's certification that not only one but three notices of
the registered mail containing a copy of the order of June 28,
1982 was sent to respondent PNB's counsel at the PNB
Building at Escolta, Manila which is his address of record in
this case. Consequently the entry of judgment Order of
September 14, 1982.

Petitioner alleges that it is not the respondent court but the Securities and
Exchange Commission which has jurisdiction over the private respondents'
motions, which raised as issue the corporate existence of PBM. Petitioner
further submits that the respondent court committed grave abuse of discretion
in ordering the cancellation of entries in the certificates of title of respondents
on the following grounds: 1) the motion for cancellation would amount to a
collateral attack upon the due incorporation of PBM which cannot be done
legally, 2) the contract of lease between PBM as petitioner's assignor and
private respondents did not expire since PBM exercised its option to renew the
lease with the acquiescence of private respondents, and 3) respondent court's
ruling that ownership over the improvements passed from PBM to private
respondents upon the expiration of lease violates the law and the contract
between the parties.

xxx xxx xxx

The respondent PNB's counsel at the hearing of said incidents
on October 12, 1982 admitted that the aforesaid registered
notices could have been received by PNB's regular Receiving
Section at the PNB Building at the Escolta but could not have
been forwarded by said Receiving Section to said counsel's
Litigation and Collection Division, Legal Department at an
upper floor of the same building. Thus the presumption that
official duty was regularly performed by the postmaster was
not overcome, as most recently reiterated by the Supreme
Court in Feraren vs. Santos promulgated on April 27, 1982,
113, SCRA 707 . . . (p. 195, Rollo)
Section 8 of Rule 13 of the Rules of Court, as amended, provides that service
by registered mail is complete upon actual receipt by the addressee; but if he
fails to claim his mail from the post office within five (5) days from the date of
first notice of the postmaster, service shall take effect at the expiration of such
time. The fair and just application of that exception depends upon the
conclusive proof that the first notice was sent by the postmaster to the
addressee. The best evidence of that fact would be the certification from the
postmaster (Barrameda v. Castillo, L-27211, July 6, 1977, 78 SCRA 1).
In the instant case, the respondent court found that the postmaster's
certification stated that three (3) notices of the registered mail which contained
the order of June 28, 1982 denying the motion for reconsideration of the order
of April 22, 1982, were sent to petitioner PNB's counsel at Escolta, Manila
which is the address stated in the record of the case. The factual findings of
the trial court bear great weight and is binding upon this Court. Hence, as
between the denial of the petitioners' counsel that he received the notice of the
registered mail and the postmaster's certification that said notices were sent to
him, the postmaster's claim should prevail. The postmaster has the official duty
to send notices of registered mail and the presumption is that official duty was

Even if We were to set aside the questioned orders directing the entry of
finality of the order cancelling entries in the titles, petitioner's case must still fail
on the merits.
Private respondent's motion with the respondent court was for the cancellation
of the entries on their titles on the ground that the contract of lease executed
between them and PBM had expired. This action is civil in nature and is within
the jurisdiction of the respondent court. The circumstance that PBM as one of
the contracting parties is a corporation whose corporate term had expired and
which fact was made the basis for the termination of the lease is not sufficient
to confer jurisdiction on the Securities and Exchange Commission over the
case. Presidential Decree No. 902-A, as amended, enumerates the cases over
which the SEC has exclusive jurisdiction and authority to resolve. The case at
bar is not covered by the enumeration.
Anent the issue of whether the cancellation of the entries on respondent's
certificates of title is valid and proper, We find that the respondent court did not
act in excess of its jurisdiction, in ordering the same.
The contract of lease expressly provides that the term of the lease shall be
twenty years from the execution of the contract but can be extended for
another period of twenty years at the option of the lessee should the corporate
term be extended in accordance with law. Clearly, the option of the lessee to
extend the lease for another period of twenty years can be exercised only if the
lessee as corporation renews or extends its corporate term of existence in
accordance with the Corporation Code which is the applicable law. Contracts
are to be interpreted according to their literal meaning and should not be
interpreted beyond their obvious intendment. Thus, in the instant case, the
initial term of the contract of lease which commenced on March 1, 1954 ended
on March 1, 1974. PBM as lessee continued to occupy the leased premises

beyond that date with the acquiescence and consent of the respondents as
lessor. Records show however, that PBM as a corporation had a corporate life
of only twenty-five (25) years which ended an January 19, 1977. It should be
noted however that PBM allowed its corporate term to expire without complying
with the requirements provided by law for the extension of its corporate term of
existence.
Section 11 of Corporation Code provides that a corporation shall exist for a
period not exceeding fifty (50) years from the date of incorporation unless
sooner dissolved or unless said period is extended. Upon the expiration of the
period fixed in the articles of incorporation in the absence of compliance with
the legal requisites for the extension of the period, the corporation ceases to
exist and is dissolved ipso facto (16 Fletcher 671 cited by Aguedo F. Agbayani,
Commercial Laws of the Philippines, Vol. 3, 1988 Edition p. 617). When the
period of corporate life expires, the corporation ceases to be a body corporate
for the purpose of continuing the business for which it was organized. But it
shall nevertheless be continued as a body corporate for three years after the
time when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it gradually to settle and close its
affairs, to dispose of and convey its property and to divide its assets (Sec. 122,
Corporation Code). There is no need for the institution of a proceeding for quo
warranto to determine the time or date of the dissolution of a corporation
because the period of corporate existence is provided in the articles of
incorporation. When such period expires and without any extension having
been made pursuant to law, the corporation is dissolved automatically insofar
as the continuation of its business is concerned. The quo warranto proceeding
under Rule 66 of the Rules of Court, as amended, may be instituted by the
Solicitor General only for the involuntary dissolution of a corporation on the
following grounds: a) when the corporation has offended against a provision of
an Act for its creation or renewal; b) when it has forfeited its privileges and
franchises by non-user; c) when it has committed or omitted an act which
amounts to a surrender of its corporate rights, privileges or franchises; d) when
it has mis-used a right, privilege or franchise conferred upon it by law, or when
it has exercised a right, privilege or franchise in contravention of law. Hence,
there is no need for the SEC to make an involuntary dissolution of a
corporation whose corporate term had ended because its articles of
incorporation had in effect expired by its own limitation.
Considering the foregoing in relation to the contract of lease between the
parties herein, when PBM's corporate life ended on January 19, 1977 and its 3year period for winding up and liquidation expired on January 19, 1980, the
option of extending the lease was likewise terminated on January 19, 1977
because PBM failed to renew or extend its corporate life in accordance with
law. From then on, the respondents can exercise their right to terminate the
lease pursuant to the stipulations in the contract.

We now come to the question of the ownership over the improvements

constructed by PBM over the leased premises, which improvements were
mortgaged in favor of PNB, petitioner herein.
The rights of the lessor and the lessee over the improvements which the latter
constructed on the leased premises is governed by Article 1678 of the Civil
Code which provides:
Art. 1678. If the lessee makes, in good faith, useful
improvements which are suitable to the use for which the lease
is intended, without altering the form or substance of the
property leased, the lessor upon the termination of the lease
shall pay the lessee one-half of the value of the improvements
at that time. Should the lessor refuse to reimburse said
amount, the lessee may remove the improvements, even
though the principal thing may suffer damage thereby. He shall
not however, cause any more impairment upon the property
leased than is necessary. . . .
The aforequoted provision gives the lessee the right to remove the
improvements if the lessor chooses not to pay one-half of the value thereof.
However, in the case at bar, the law will not apply because the parties herein
have stipulated in the contract their own terms and conditions concerning the
improvements, to wit, that the lessee, namely PBM, bound itself to remove the
improvements before the termination of the lease. Petitioner PNB, as assignee
of PBM succeeded to the obligation of the latter under the contract of lease. It
could not possess rights more than what PBM had as lessee under the
contract. Hence, petitioner was duty bound to remove the improvements before
the expiration of the period of lease as what we have already discussed in the
preceding paragraphs. Its failure to do so when the lease was terminated was
tantamount to a waiver of its rights and interests over the improvements on the
leased premises.
In view of the foregoing, this Court finds that respondent court did not act with
grave abuse of discretion in directing the cancellation of entries on private
respondents' certificates of title as set forth in the questioned order.
ACCORDINGLY, the petition is DISMISSED and the assailed orders of
respondent court dated April 22, 1982, September 14, 1982 and January 12,
1983 are AFFIRMED.
SO ORDERED.
Cruz, Grio-Aquino and Bellosillo, JJ., concur.

G.R. No. 150416

July 21, 2006

SEVENTH DAY ADVENTIST CONFERENCE CHURCH OF SOUTHERN

PHILIPPINES, INC., and/or represented by MANASSEH C. ARRANGUEZ,
BRIGIDO P. GULAY, FRANCISCO M. LUCENARA, DIONICES O. TIPGOS,
LORESTO C. MURILLON, ISRAEL C. NINAL, GEORGE G. SOMOSOT,
JESSIE T. ORBISO, LORETO PAEL and JOEL BACUBAS, petitioners,
vs.
NORTHEASTERN MINDANAO MISSION OF SEVENTH DAY ADVENTIST,
INC., and/or represented by JOSUE A. LAYON, WENDELL M. SERRANO,
FLORANTE P. TY and JETHRO CALAHAT and/or SEVENTH DAY
*
ADVENTIST CHURCH [OF] NORTHEASTERN MINDANAO MISSION,
Respondents.
DECISION
CORONA, J.:
1

This petition for review on certiorari assails the Court of Appeals (CA) decision
2
and resolution in CA-G.R. CV No. 41966 affirming, with modification, the
decision of the Regional Trial Court (RTC) of Bayugan, Agusan del Sur,
Branch 7 in Civil Case No. 63.
This case involves a 1,069 sq. m. lot covered by Transfer Certificate of Title
(TCT) No. 4468 in Bayugan, Agusan del Sur originally owned by Felix Cosio
and his wife, Felisa Cuysona.
On April 21, 1959, the spouses Cosio donated the land to the South Philippine
Union Mission of Seventh Day Adventist Church of Bayugan Esperanza,
3
Agusan (SPUM-SDA Bayugan). Part of the deed of donation read:
KNOW ALL MEN BY THESE PRESENTS:
That we Felix Cosio[,] 49 years of age[,] and Felisa Cuysona[,] 40 years of age,
[h]usband and wife, both are citizen[s] of the Philippines, and resident[s] with

post office address in the Barrio of Bayugan, Municipality of Esperanza,

Province of Agusan, Philippines, do hereby grant, convey and forever quit
claim by way of Donation or gift unto the South Philippine [Union] Mission of
Seventh Day Adventist Church of Bayugan, Esperanza, Agusan, all the rights,
title, interest, claim and demand both at law and as well in possession as in
expectancy of in and to all the place of land and portion situated in the Barrio of
Bayugan, Municipality of Esperanza, Province of Agusan, Philippines, more
particularly and bounded as follows, to wit:
1. a parcel of land for Church Site purposes only.

On appeal, the CA affirmed the RTC decision but deleted the award of moral
8
damages and attorneys fees. Petitioners motion for reconsideration was
likewise denied. Thus, this petition.
The issue in this petition is simple: should SDA-NEMMs ownership of the lot
9
covered by TCT No. 4468 be upheld? We answer in the affirmative.
The controversy between petitioners and respondents involves two supposed
transfers of the lot previously owned by the spouses Cosio: (1) a donation to
petitioners alleged predecessors-in-interest in 1959 and (2) a sale to
respondents in 1980.

2. situated [in Barrio Bayugan, Esperanza].

3. Area: 30 meters wide and 30 meters length or 900 square meters.

Donation is undeniably one of the modes of acquiring ownership of real

property. Likewise, ownership of a property may be transferred by tradition as
a consequence of a sale.

4. Lot No. 822-Pls-225. Homestead Application No. V-36704, Title No. P-285.
5. Bounded Areas
North by National High Way; East by Bricio Gerona; South by Serapio Abijaron
4
and West by Feliz Cosio xxx.
The donation was allegedly accepted by one Liberato Rayos, an elder of the
Seventh Day Adventist Church, on behalf of the donee.
Twenty-one years later, however, on February 28, 1980, the same parcel of
land was sold by the spouses Cosio to the Seventh Day Adventist Church of
5
Northeastern Mindanao Mission (SDA-NEMM). TCT No. 4468 was thereafter
6
issued in the name of SDA-NEMM.
Claiming to be the alleged donees successors-in-interest, petitioners asserted
ownership over the property. This was opposed by respondents who argued
that at the time of the donation, SPUM-SDA Bayugan could not legally be a
donee
because, not having been incorporated yet, it had no juridical personality.
Neither were petitioners members of the local church then, hence, the donation
could not have been made particularly to them.
On September 28, 1987, petitioners filed a case, docketed as Civil Case No.
63 (a suit for cancellation of title, quieting of ownership and possession,
declaratory relief and reconveyance with prayer for preliminary injunction and
damages), in the RTC of Bayugan, Agusan del Sur. After trial, the trial court
7
rendered a decision on November 20, 1992 upholding the sale in favor of
respondents.

Petitioners contend that the appellate court should not have ruled on the
validity of the donation since it was not among the issues raised on appeal.
This is not correct because an appeal generally opens the entire case for
review.
We agree with the appellate court that the alleged donation to petitioners was
void.
Donation is an act of liberality whereby a person disposes gratuitously of a
thing or right in favor of another person who accepts it. The donation could not
have been made in favor of an entity yet inexistent at the time it was made. Nor
could it have been accepted as there was yet no one to accept it.
The deed of donation was not in favor of any informal group of SDA members
but a supposed SPUM-SDA Bayugan (the local church) which, at the time, had
neither juridical personality nor capacity to accept such gift.
Declaring themselves a de facto corporation, petitioners allege that they should
benefit from the donation.
But there are stringent requirements before one can qualify as a de facto
corporation:
(a) the existence of a valid law under which it may be incorporated;
(b) an attempt in good faith to incorporate; and
10

(c) assumption of corporate powers.

11

While there existed the old Corporation Law (Act 1459), a law under which
SPUM-SDA Bayugan could have been organized, there is no proof that there
was an attempt to incorporate at that time.
The filing of articles of incorporation and the issuance of the certificate of
12
incorporation are essential for the existence of a de facto corporation. We
have held that an organization not registered with the Securities and Exchange
Commission (SEC) cannot be considered a corporation in any concept, not
13
even as a corporation de facto. Petitioners themselves admitted that at the
time of the donation, they were not registered with the SEC, nor did they even
14
attempt to organize to comply with legal requirements.
Corporate existence begins only from the moment a certificate of incorporation
is issued. No such certificate was ever issued to petitioners or their supposed
predecessor-in-interest at the time of the donation. Petitioners obviously could
not have claimed succession to an entity that never came to exist. Neither
could the principle of separate juridical personality apply since there was never
15
any corporation
to speak of. And, as already stated, some of the
representatives of petitioner Seventh Day Adventist Conference Church of
Southern Philippines, Inc. were not even members of the local church then,
16
thus, they could not even claim that the donation was particularly for them.
"The de facto doctrine thus effects a compromise between two conflicting
public interest[s]the one opposed to an unauthorized assumption of
corporate privileges; the other in favor of doing justice to the parties and of
establishing a general assurance of security in business dealing with
17
corporations."
Generally, the doctrine exists to protect the public dealing with supposed
18
corporate entities, not to favor the defective or non-existent corporation.
In view of the foregoing, petitioners arguments anchored on their supposed de
facto status hold no water. We are convinced that there was no donation to
petitioners or their supposed predecessor-in-interest.
On the other hand, there is sufficient basis to affirm the title of SDA-NEMM.
The factual findings of the trial court in this regard were not convincingly
disputed. This Court is not a trier of facts. Only questions of law are the proper
19
subject of a petition for review on certiorari.
Sustaining the validity of respondents title as well as their right of ownership
over the property, the trial court stated:
[W]hen Felix Cosio was shown the Absolute Deed of Sale during the hearing
xxx he acknowledged that the same was his xxx but that it was not his intention
to sell the controverted property because he had previously donated the same

lot to the South Philippine Union Mission of SDA Church of BayuganEsperanza. Cosio avouched that had it been his intendment to sell, he would
not have disposed of it for a mere P2,000.00 in two installments but for
P50,000.00 or P60,000.00. According to him, the P2,000.00 was not a
consideration of the sale but only a form of help extended.
A thorough analysis and perusal, nonetheless, of the Deed of Absolute
Sale disclosed that it has the essential requisites of contracts pursuant
to xxx Article 1318 of the Civil Code, except that the consideration of
P2,000.00 is somewhat insufficient for a [1,069-square meter] land. Would then
this inadequacy of the consideration render the contract invalid?
Article 1355 of the Civil Code provides:
Except in cases specified by law, lesion or inadequacy of cause shall not
invalidate a contract, unless there has been fraud, mistake or undue influence.
No evidence [of fraud, mistake or undue influence] was adduced by
[petitioners].
xxx
Well-entrenched is the rule that a Certificate of Title is generally a
conclusive evidence of [ownership] of the land. There is that strong and
solid presumption that titles were legally issued and that they are valid. It is
irrevocable and indefeasible and the duty of the Court is to see to it that the
title is maintained and respected unless challenged in a direct proceeding. xxx
The title shall be received as evidence in all the Courts and shall be conclusive
as to all matters contained therein.
[This action was instituted almost seven years after the certificate of title in
20
respondents name was issued in 1980.]
According to Art. 1477 of the Civil Code, the ownership of the thing sold shall
be transferred to the vendee upon the actual or constructive delivery thereof.
On this, the noted author Arturo Tolentino had this to say:
The execution of [a] public instrument xxx transfers the ownership from the
vendor to the vendee who may thereafter exercise the rights of an owner over
21
the same
Here, transfer of ownership from the spouses Cosio to SDA-NEMM was made
upon constructive delivery of the property on February 28, 1980 when the sale
22
was made through a public instrument. TCT No. 4468 was thereafter issued
and it remains in the name of SDA-NEMM.

WHEREFORE, the petition is hereby DENIED.

Costs against petitioners.
SO ORDERED.
Puno, Chairperson, Sandoval-Gutierrez, Azcuna, Garcia, J.J., concur.

G.R. No. 157802

October 13, 2010

MATLING INDUSTRIAL AND COMMERCIAL CORPORATION, RICHARD K.

SPENCER, CATHERINE SPENCER, AND ALEX MANCILLA, Petitioners,
vs.
RICARDO R. COROS, Respondent.
DECISION
BERSAMIN, J.:
This case reprises the jurisdictional conundrum of whether a complaint for
illegal dismissal is cognizable by the Labor Arbiter (LA) or by the Regional Trial
Court (RTC). The determination of whether the dismissed officer was a regular
employee or a corporate officer unravels the conundrum. In the case of the
regular employee, the LA has jurisdiction; otherwise, the RTC exercises the
legal authority to adjudicate.
In this appeal via petition for review on certiorari, the petitioners challenge the
1
2
decision dated September 13, 2002 and the resolution dated April 2, 2003,
both promulgated in C.A.-G.R. SP No. 65714 entitled Matling Industrial and
Commercial Corporation, et al. v. Ricardo R. Coros and National Labor
Relations Commission, whereby by the Court of Appeals (CA) sustained the
ruling of the National Labor Relations Commission (NLRC) to the effect that the
LA had jurisdiction because the respondent was not a corporate officer of
petitioner Matling Industrial and Commercial Corporation (Matling).
Antecedents
After his dismissal by Matling as its Vice President for Finance and
Administration, the respondent filed on August 10, 2000 a complaint for illegal

suspension and illegal dismissal against Matling and some of its corporate
officers (petitioners) in the NLRC, Sub-Regional Arbitration Branch XII, Iligan
3
City.
4

The petitioners moved to dismiss the complaint, raising the ground, among
others, that the complaint pertained to the jurisdiction of the Securities and
Exchange Commission (SEC) due to the controversy being intra-corporate
inasmuch as the respondent was a member of Matlings Board of Directors
aside from being its Vice-President for Finance and Administration prior to his
termination.
5

The respondent opposed the petitioners motion to dismiss, insisting that his
status as a member of Matlings Board of Directors was doubtful, considering
that he had not been formally elected as such; that he did not own a single
share of stock in Matling, considering that he had been made to sign in blank
an undated indorsement of the certificate of stock he had been given in 1992;
that Matling had taken back and retained the certificate of stock in its custody;
and that even assuming that he had been a Director of Matling, he had been
removed as the Vice President for Finance and Administration, not as a
Director, a fact that the notice of his termination dated April 10, 2000 showed.
6

On October 16, 2000, the LA granted the petitioners motion to dismiss, ruling
that the respondent was a corporate officer because he was occupying the
position of Vice President for Finance and Administration and at the same time
was a Member of the Board of Directors of Matling; and that, consequently, his
removal was a corporate act of Matling and the controversy resulting from such
removal was under the jurisdiction of the SEC, pursuant to Section 5,
paragraph (c) of Presidential Decree No. 902.
Ruling of the NLRC
7

The respondent appealed to the NLRC, urging that:

I

WHEREFORE, the Order appealed from is SET ASIDE. A new one is entered
declaring and holding that the case at bench does not involve any
intracorporate matter. Hence, jurisdiction to hear and act on said case is
vested with the Labor Arbiter, not the SEC, considering that the position of
Vice-President for Finance and Administration being held by complainantappellant is not listed as among respondent's corporate officers.
Accordingly, let the records of this case be REMANDED to the Arbitration
Branch of origin in order that the Labor Arbiter below could act on the case at
bench, hear both parties, receive their respective evidence and position papers
fully observing the requirements of due process, and resolve the same with
reasonable dispatch.
SO ORDERED.
9

The petitioners sought reconsideration, reiterating that the respondent, being

a member of the Board of Directors, was a corporate officer whose removal
was not within the LAs jurisdiction.
The petitioners later submitted to the NLRC in support of the motion for
reconsideration the certified machine copies of Matlings Amended Articles of
Incorporation and By Laws to prove that the President of Matling was thereby
granted "full power to create new offices and appoint the officers thereto, and
the minutes of special meeting held on June 7, 1999 by Matlings Board of
Directors to prove that the respondent was, indeed, a Member of the Board of
10
Directors.
Nonetheless, on April 30, 2001, the NLRC denied the petitioners motion for
11
reconsideration.

THE HONORABLE LABOR ARBITER COMMITTED GRAVE ABUSE OF

DISCRETION GRANTING APPELLEES MOTION TO DISMISS WITHOUT
GIVING THE APPELLANT AN OPPORTUNITY TO FILE HIS OPPOSITION
THERETO THEREBY VIOLATING THE BASIC PRINCIPLE OF DUE
PROCESS.
II
THE HONORABLE LABOR ARBITER COMMITTED AN
DISMISSING THE CASE FOR LACK OF JURISDICTION.

On March 13, 2001, the NLRC set aside the dismissal, concluding that the
respondents complaint for illegal dismissal was properly cognizable by the LA,
not by the SEC, because he was not a corporate officer by virtue of his position
in Matling, albeit high ranking and managerial, not being among the positions
8
listed in Matlings Constitution and By-Laws. The NLRC disposed thuswise:

ERROR IN

Ruling of the CA
The petitioners elevated the issue to the CA by petition for certiorari, docketed
as C.A.-G.R. No. SP 65714, contending that the NLRC committed grave abuse
of discretion amounting to lack of jurisdiction in reversing the correct decision
of the LA.
12

In its assailed decision promulgated on September 13, 2002,

dismissed the petition for certiorari, explaining:

the CA

For a position to be considered as a corporate office, or, for that matter, for one
to be considered as a corporate officer, the position must, if not listed in the bylaws, have been created by the corporation's board of directors, and the
occupant thereof appointed or elected by the same board of directors or
stockholders. This is the implication of the ruling in Tabang v. National Labor
Relations Commission, which reads:

of Directors as well as its Vice President for Finance and Administration; and
that the CA consequently erred in holding that the LA had jurisdiction.

"The president, vice president, secretary and treasurer are commonly regarded
as the principal or executive officers of a corporation, and modern corporation
statutes usually designate them as the officers of the corporation. However,
other offices are sometimes created by the charter or by-laws of a corporation,
or the board of directors may be empowered under the by-laws of a
corporation to create additional offices as may be necessary.

Ruling

It has been held that an 'office' is created by the charter of the corporation and
the officer is elected by the directors or stockholders. On the other hand, an
'employee' usually occupies no office and generally is employed not by action
of the directors or stockholders but by the managing officer of the corporation
who also determines the compensation to be paid to such employee."
This ruling was reiterated in the subsequent cases of Ongkingco v. National
Labor Relations Commission and De Rossi v. National Labor Relations
Commission.
The position of vice-president for administration and finance, which Coros used
to hold in the corporation, was not created by the corporations board of
directors but only by its president or executive vice-president pursuant to the
by-laws of the corporation. Moreover, Coros appointment to said position was
not made through any act of the board of directors or stockholders of the
corporation. Consequently, the position to which Coros was appointed and
later on removed from, is not a corporate office despite its nomenclature, but
an ordinary office in the corporation.
Coros alleged illegal dismissal therefrom is, therefore, within the jurisdiction of
the labor arbiter.

The decisive issue is whether the respondent was a corporate officer of Matling
or not. The resolution of the issue determines whether the LA or the RTC had
jurisdiction over his complaint for illegal dismissal.

The appeal fails.

I
The Law on Jurisdiction in Dismissal Cases
As a rule, the illegal dismissal of an officer or other employee of a private
employer is properly cognizable by the LA. This is pursuant to Article 217 (a) 2
of the Labor Code, as amended, which provides as follows:
Article 217. Jurisdiction of the Labor Arbiters and the Commission. - (a) Except
as otherwise provided under this Code, the Labor Arbiters shall have original
and exclusive jurisdiction to hear and decide, within thirty (30) calendar days
after the submission of the case by the parties for decision without extension,
even in the absence of stenographic notes, the following cases involving all
workers, whether agricultural or non-agricultural:
1. Unfair labor practice cases;
2. Termination disputes;
3. If accompanied with a claim for reinstatement, those cases
that workers may file involving wages, rates of pay, hours of
work and other terms and conditions of employment;

WHEREFORE, the petition for certiorari is hereby DISMISSED.

4. Claims for actual, moral, exemplary and other forms of
damages arising from the employer-employee relations;

SO ORDERED.
13

The CA denied the petitioners motion for reconsideration on April 2, 2003.

Issue

5. Cases arising from any violation of Article 264 of this Code,

including questions involving the legality of strikes and
lockouts; and

Thus, the petitioners are now before the Court for a review on certiorari,
positing that the respondent was a stockholder/member of the Matlings Board

6. Except claims for Employees Compensation, Social

Security, Medicare and maternity benefits, all other claims

arising from employer-employee relations, including those of

persons in domestic or household service, involving an amount
exceeding five thousand pesos (P5,000.00) regardless of
whether accompanied with a claim for reinstatement.

5.2 of RA No. 8799, supra, should it turn out that the respondent was a
corporate, not a regular, officer of Matling.
II

(b) The Commission shall have exclusive appellate jurisdiction over all
cases decided by Labor Arbiters.

Was the Respondents Position of Vice President

for Administration and Finance a Corporate Office?

(c) Cases arising from the interpretation or implementation of collective

bargaining agreements and those arising from the interpretation or
enforcement of company personnel policies shall be disposed of by the
Labor Arbiter by referring the same to the grievance machinery and
voluntary arbitration as may be provided in said agreements. (As
amended by Section 9, Republic Act No. 6715, March 21, 1989).

We must first resolve whether or not the respondents position as Vice

President for Finance and Administration was a corporate office. If it was, his
dismissal by the Board of Directors rendered the matter an intra-corporate
dispute cognizable by the RTC pursuant to RA No. 8799.

Where the complaint for illegal dismissal concerns a corporate officer,

however, the controversy falls under the jurisdiction of the Securities and
Exchange Commission (SEC), because the controversy arises out of intracorporate or partnership relations between and among stockholders, members,
or associates, or between any or all of them and the corporation, partnership,
or association of which they are stockholders, members, or associates,
respectively; and between such corporation, partnership, or association and
the State insofar as the controversy concerns their individual franchise or right
to exist as such entity; or because the controversy involves the election or
appointment of a director, trustee, officer, or manager of such corporation,
14
partnership, or association. Such controversy, among others, is known as an
intra-corporate dispute.
15

Effective on August 8, 2000, upon the passage of Republic Act No. 8799,
otherwise known as The Securities Regulation Code, the SECs jurisdiction
over all intra-corporate disputes was transferred to the RTC, pursuant to
Section 5.2 of RA No. 8799, to wit:

5.2. The Commissions jurisdiction over all cases enumerated under Section 5
of Presidential Decree No. 902-A is hereby transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court: Provided, that the Supreme
Court in the exercise of its authority may designate the Regional Trial Court
branches that shall exercise jurisdiction over these cases. The Commission
shall retain jurisdiction over pending cases involving intra-corporate disputes
submitted for final resolution which should be resolved within one (1) year from
the enactment of this Code. The Commission shall retain jurisdiction over
pending suspension of payments/rehabilitation cases filed as of 30 June 2000
until finally disposed.
Considering that the respondents complaint for illegal dismissal was
commenced on August 10, 2000, it might come under the coverage of Section

The petitioners contend that the position of Vice President for Finance and
Administration was a corporate office, having been created by Matlings
16
President pursuant to By-Law No. V, as amended, to wit:
BY LAW NO. V
Officers
The President shall be the executive head of the corporation; shall preside
over the meetings of the stockholders and directors; shall countersign all
certificates, contracts and other instruments of the corporation as authorized by
the Board of Directors; shall have full power to hire and discharge any or all
employees of the corporation; shall have full power to create new offices and to
appoint the officers thereto as he may deem proper and necessary in the
operations of the corporation and as the progress of the business and welfare
of the corporation may demand; shall make reports to the directors and
stockholders and perform all such other duties and functions as are incident to
his office or are properly required of him by the Board of Directors. In case of
the absence or disability of the President, the Executive Vice President shall
have the power to exercise his functions.
The petitioners argue that the power to create corporate offices and to appoint
the individuals to assume the offices was delegated by Matlings Board of
Directors to its President through By-Law No. V, as amended; and that any
office the President created, like the position of the respondent, was as valid
and effective a creation as that made by the Board of Directors, making the
office a corporate office. In justification, they cite Tabang v. National Labor
17
Relations Commission, which held that "other offices are sometimes created
by the charter or by-laws of a corporation, or the board of directors may be
empowered under the by-laws of a corporation to create additional officers as
may be necessary."
The respondent counters that Matlings By-Laws did not list his position as Vice
President for Finance and Administration as one of the corporate offices; that

Matlings By-Law No. III listed only four corporate officers, namely: President,
18
Executive Vice President, Secretary, and Treasurer;
that the corporate
offices contemplated in the phrase "and such other officers as may be provided
for in the by-laws" found in Section 25 of the Corporation Code should be
clearly and expressly stated in the By-Laws; that the fact that Matlings By-Law
No. III dealt with Directors & Officers while its By-Law No. V dealt with Officers
proved that there was a differentiation between the officers mentioned in the
two provisions, with those classified under By-Law No. V being ordinary or
non-corporate officers; and that the officer, to be considered as a corporate
officer, must be elected by the Board of Directors or the stockholders, for the
President could only appoint an employee to a position pursuant to By-Law No.
V.

An "office" is created by the charter of the corporation and the officer is elected
by the directors or stockholders. On the other hand, an employee occupies no
office and generally is employed not by the action of the directors or
stockholders but by the managing officer of the corporation who also
determines the compensation to be paid to such employee.

We agree with respondent.

This interpretation is the correct application of Section 25 of the Corporation

Code, which plainly states that the corporate officers are the President,
Secretary, Treasurer and such other officers as may be provided for in the ByLaws. Accordingly, the corporate officers in the context of PD No. 902-A are
exclusively those who are given that character either by the Corporation Code
or by the corporations By-Laws.

Section 25 of the Corporation Code provides:

Section 25. Corporate officers, quorum.--Immediately after their election, the
directors of a corporation must formally organize by the election of a president,
who shall be a director, a treasurer who may or may not be a director, a
secretary who shall be a resident and citizen of the Philippines, and such
other officers as may be provided for in the by-laws. Any two (2) or more
positions may be held concurrently by the same person, except that no one
shall act as president and secretary or as president and treasurer at the same
time.
The directors or trustees and officers to be elected shall perform the duties
enjoined on them by law and the by-laws of the corporation. Unless the articles
of incorporation or the by-laws provide for a greater majority, a majority of the
number of directors or trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate business, and every
decision of at least a majority of the directors or trustees present at a meeting
at which there is a quorum shall be valid as a corporate act, except for the
election of officers which shall require the vote of a majority of all the members
of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
Conformably with Section 25, a position must be expressly mentioned in the
By-Laws in order to be considered as a corporate office. Thus, the creation of
an office pursuant to or under a By-Law enabling provision is not enough to
19
make a position a corporate office. Guerrea v. Lezama, the first ruling on the
matter, held that the only officers of a corporation were those given that
character either by the Corporation Code or by the By-Laws; the rest of the
corporate officers could be considered only as employees or subordinate
20
officials. Thus, it was held in Easycall Communications Phils., Inc. v. King:

In this case, respondent was appointed vice president for nationwide

expansion by Malonzo, petitioner's general manager, not by the board of
directors of petitioner. It was also Malonzo who determined the compensation
package of respondent. Thus, respondent was an employee, not a "corporate
officer." The CA was therefore correct in ruling that jurisdiction over the case
was properly with the NLRC, not the SEC (now the RTC).

A different interpretation can easily leave the way open for the Board of
Directors to circumvent the constitutionally guaranteed security of tenure of the
employee by the expedient inclusion in the By-Laws of an enabling clause on
the creation of just any corporate officer position.
It is relevant to state in this connection that the SEC, the primary agency
administering the Corporation Code, adopted a similar interpretation of Section
21
25 of the Corporation Code in its Opinion dated November 25, 1993, to wit:
Thus, pursuant to the above provision (Section 25 of the Corporation Code),
whoever are the corporate officers enumerated in the by-laws are the exclusive
Officers of the corporation and the Board has no power to create other Offices
without amending first the corporate By-laws. However, the Board may
create appointive positions other than the positions of corporate
Officers, but the persons occupying such positions are not considered
as corporate officers within the meaning of Section 25 of the Corporation
Code and are not empowered to exercise the functions of the corporate
Officers, except those functions lawfully delegated to them. Their functions and
duties are to be determined by the Board of Directors/Trustees.
Moreover, the Board of Directors of Matling could not validly delegate the
power to create a corporate office to the President, in light of Section 25 of the
Corporation Code requiring the Board of Directors itself to elect the corporate
officers. Verily, the power to elect the corporate officers was a discretionary
power that the law exclusively vested in the Board of Directors, and could not
22
be delegated to subordinate officers or agents. The office of Vice President

for Finance and Administration created by Matlings President pursuant to By

Law No. V was an ordinary, not a corporate, office.
To emphasize, the power to create new offices and the power to appoint the
officers to occupy them vested by By-Law No. V merely allowed Matlings
President to create non-corporate offices to be occupied by ordinary
employees of Matling. Such powers were incidental to the Presidents duties as
the executive head of Matling to assist him in the daily operations of the
business.
The petitioners reliance on Tabang, supra, is misplaced. The statement in
Tabang, to the effect that offices not expressly mentioned in the By-Laws but
were created pursuant to a By-Law enabling provision were also considered
corporate offices, was plainly obiter dictum due to the position subject of the
controversy being mentioned in the By-Laws. Thus, the Court held therein that
the position was a corporate office, and that the determination of the rights and
liabilities arising from the ouster from the position was an intra-corporate
controversy within the SECs jurisdiction.
23

In Nacpil v. Intercontinental Broadcasting Corporation, which may be the

more appropriate ruling, the position subject of the controversy was not
expressly mentioned in the By-Laws, but was created pursuant to a By-Law
enabling provision authorizing the Board of Directors to create other offices
that the Board of Directors might see fit to create. The Court held there that the
position was a corporate office, relying on the obiter dictum in Tabang.
Considering that the observations earlier made herein show that the
soundness of their dicta is not unassailable, Tabang and Nacpil should no
longer be controlling.
III
Did Respondents Status as Director and
Stockholder Automatically Convert his Dismissal
into an Intra-Corporate Dispute?
Yet, the petitioners insist that because the respondent was a
Director/stockholder of Matling, and relying on Paguio v. National Labor
24
Relations Commission
and Ongkingko v. National Labor Relations
25
Commission, the NLRC had no jurisdiction over his complaint, considering
that any case for illegal dismissal brought by a stockholder/officer against the
corporation was an intra-corporate matter that must fall under the jurisdiction of
the SEC conformably with the context of PD No. 902-A.
The petitioners insistence is bereft of basis.

To begin with, the reliance on Paguio and Ongkingko is misplaced. In both

rulings, the complainants were undeniably corporate officers due to their
positions being expressly mentioned in the By-Laws, aside from the fact that
both of them had been duly elected by the respective Boards of Directors. But
the herein respondents position of Vice President for Finance and
Administration was not expressly mentioned in the By-Laws; neither was the
position of Vice President for Finance and Administration created by Matlings
Board of Directors. Lastly, the President, not the Board of Directors, appointed
him.
True it is that the Court pronounced in Tabang as follows:
Also, an intra-corporate controversy is one which arises between a stockholder
and the corporation. There is no distinction, qualification or any exemption
whatsoever. The provision is broad and covers all kinds of controversies
26
between stockholders and corporations.
However, the Tabang pronouncement is not controlling because it is too
sweeping and does not accord with reason, justice, and fair play. In order to
determine whether a dispute constitutes an intra-corporate controversy or not,
the Court considers two elements instead, namely: (a) the status or
relationship of the parties; and (b) the nature of the question that is the subject
27
of their controversy. This was our thrust in Viray v. Court of Appeals:
The establishment of any of the relationships mentioned above will not
necessarily always confer jurisdiction over the dispute on the SEC to the
exclusion of regular courts. The statement made in one case that the rule
admits of no exceptions or distinctions is not that absolute. The better policy in
determining which body has jurisdiction over a case would be to consider not
only the status or relationship of the parties but also the nature of the question
that is the subject of their controversy.
Not every conflict between a corporation and its stockholders involves
corporate matters that only the SEC can resolve in the exercise of its
adjudicatory or quasi-judicial powers. If, for example, a person leases an
apartment owned by a corporation of which he is a stockholder, there should
be no question that a complaint for his ejectment for non-payment of rentals
would still come under the jurisdiction of the regular courts and not of the SEC.
By the same token, if one person injures another in a vehicular accident, the
complaint for damages filed by the victim will not come under the jurisdiction of
the SEC simply because of the happenstance that both parties are
stockholders of the same corporation. A contrary interpretation would dissipate
the powers of the regular courts and distort the meaning and intent of PD No.
902-A.

28

In another case, Mainland Construction Co., Inc. v. Movilla,

reiterated these determinants thuswise:

the Court

In order that the SEC (now the regular courts) can take cognizance of a case,
the controversy must pertain to any of the following relationships:

President for Finance and Administration had been gradual but steady, as the
following sequence indicates:
1966 Bookkeeper
1968 Senior Accountant

a) between the corporation, partnership or association and the public;

1969 Chief Accountant
b) between the corporation, partnership or association and its
stockholders, partners, members or officers;
c) between the corporation, partnership or association and the State as
far as its franchise, permit or license to operate is concerned; and
d) among the stockholders, partners or associates themselves.
The fact that the parties involved in the controversy are all stockholders or that
the parties involved are the stockholders and the corporation does not
necessarily place the dispute within the ambit of the jurisdiction of SEC. The
better policy to be followed in determining jurisdiction over a case should be to
consider concurrent factors such as the status or relationship of the parties or
the nature of the question that is the subject of their controversy. In the
absence of any one of these factors, the SEC will not have jurisdiction.
Furthermore, it does not necessarily follow that every conflict between the
corporation and its stockholders would involve such corporate matters as only
the SEC can resolve in the exercise of its adjudicatory or quasi-judicial
29
powers.
The criteria for distinguishing between corporate officers who may be ousted
from office at will, on one hand, and ordinary corporate employees who may
only be terminated for just cause, on the other hand, do not depend on the
nature of the services performed, but on the manner of creation of the office. In
the respondents case, he was supposedly at once an employee, a
stockholder, and a Director of Matling. The circumstances surrounding his
appointment to office must be fully considered to determine whether the
dismissal constituted an intra-corporate controversy or a labor termination
dispute. We must also consider whether his status as Director and stockholder
had any relation at all to his appointment and subsequent dismissal as Vice
President for Finance and Administration.
Obviously enough, the respondent was not appointed as Vice President for
Finance and Administration because of his being a stockholder or Director of
Matling. He had started working for Matling on September 8, 1966, and had
been employed continuously for 33 years until his termination on April 17,
2000, first as a bookkeeper, and his climb in 1987 to his last position as Vice

1972 Office Supervisor

1973 Assistant Treasurer
1978 Special Assistant for Finance
1980 Assistant Comptroller
1983 Finance and Administrative Manager
1985 Asst. Vice President for Finance and Administration
1987 to April 17, 2000 Vice President for Finance and Administration
Even though he might have become a stockholder of Matling in 1992, his
promotion to the position of Vice President for Finance and Administration in
1987 was by virtue of the length of quality service he had rendered as an
employee of Matling. His subsequent acquisition of the status of
Director/stockholder had no relation to his promotion. Besides, his status of
Director/stockholder was unaffected by his dismissal from employment as Vice
President for Finance and Administration.1avvphi1
30

In Prudential Bank and Trust Company v. Reyes, a case involving a lady

bank manager who had risen from the ranks but was dismissed, the Court held
that her complaint for illegal dismissal was correctly brought to the NLRC,
because she was deemed a regular employee of the bank. The Court
observed thus:
It appears that private respondent was appointed Accounting Clerk by the
Bank on July 14, 1963. From that position she rose to become supervisor.
Then in 1982, she was appointed Assistant Vice-President which she occupied
until her illegal dismissal on July 19, 1991. The banks contention that she
merely holds an elective position and that in effect she is not a regular
employee is belied by the nature of her work and her length of service
with the Bank. As earlier stated, she rose from the ranks and has been
employed with the Bank since 1963 until the termination of her employment in

1991. As Assistant Vice President of the Foreign Department of the Bank, she
is tasked, among others, to collect checks drawn against overseas banks
payable in foreign currency and to ensure the collection of foreign bills or
checks purchased, including the signing of transmittal letters covering the
same. It has been stated that "the primary standard of determining regular
employment is the reasonable connection between the particular activity
performed by the employee in relation to the usual trade or business of the
employer. Additionally, "an employee is regular because of the nature of work
and the length of service, not because of the mode or even the reason for
hiring them." As Assistant Vice-President of the Foreign Department of the
Bank she performs tasks integral to the operations of the bank and her length
of service with the bank totaling 28 years speaks volumes of her status as a
regular employee of the bank. In fine, as a regular employee, she is entitled to
security of tenure; that is, her services may be terminated only for a just or
authorized cause. This being in truth a case of illegal dismissal, it is no wonder
then that the Bank endeavored to the very end to establish loss of trust and
confidence and serious misconduct on the part of private respondent but, as
will be discussed later, to no avail.
WHEREFORE, we deny the petition for review on certiorari, and affirm the
decision of the Court of Appeals.
Costs of suit to be paid by the petitioners.
SO ORDERED.

G.R. No. 151969

September 4, 2009

LUCAS P. BERSAMIN
Associate Justice

VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY

GAMBOA, AMADO M. SANTIAGO, JR., FORTUNATO DEE, AUGUSTO
SUNICO, VICTOR SALTA, FRANCISCO ORTIGAS III, ERIC ROXAS, in their
capacities as members of the Board of Directors of Valle Verde Country
Club, Inc., and JOSE RAMIREZ, Petitioners,
vs.
VICTOR AFRICA, Respondent.
DECISION
BRION, J.:
1

In this petition for review on certiorari, the parties raise a legal question on
corporate governance: Can the members of a corporations board of directors
elect another director to fill in a vacancy caused by the resignation of a holdover director?
THE FACTUAL ANTECEDENTS

On February 27, 1996, during the Annual Stockholders Meeting of petitioner

Valle Verde Country Club, Inc. (VVCC), the following were elected as members
of the VVCC Board of Directors: Ernesto Villaluna, Jaime C. Dinglasan
(Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor
Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray
2
Gamboa. In the years 1997, 1998, 1999, 2000, and 2001, however, the
requisite quorum for the holding of the stockholders meeting could not be
obtained. Consequently, the above-named directors continued to serve in the
VVCC Board in a hold-over capacity.

elected to fill a vacancy shall be elected only for the unexpired term of his
predecessor in office. xxx. [Emphasis supplied.]

On September 1, 1998, Dinglasan resigned from his position as member of the

VVCC Board. In a meeting held on October 6, 1998, the remaining directors,
still constituting a quorum of VVCCs nine-member board, elected Eric Roxas
(Roxas) to fill in the vacancy created by the resignation of Dinglasan.

Africa additionally contends that for the members to exercise the authority to fill
in vacancies in the board of directors, Section 29 requires, among others, that
there should be an unexpired term during which the successor-member shall
serve. Since Makalintals term had already expired with the lapse of the oneyear term provided in Section 23, there is no more "unexpired term" during
which Ramirez could serve.

A year later, or on November 10, 1998, Makalintal also resigned as member of

the VVCC Board. He was replaced by Jose Ramirez (Ramirez), who was
elected by the remaining members of the VVCC Board on March 6, 2001.
Respondent Africa (Africa), a member of VVCC, questioned the election of
Roxas and Ramirez as members of the VVCC Board with the Securities and
Exchange Commission (SEC) and the Regional Trial Court (RTC),
respectively. The SEC case questioning the validity of Roxas appointment was
docketed as SEC Case No. 01-99-6177. The RTC case questioning the validity
of Ramirez appointment was docketed as Civil Case No. 68726.
3

In his nullification complaint before the RTC, Africa alleged that the election of
Roxas was contrary to Section 29, in relation to Section 23, of the Corporation
Code of the Philippines (Corporation Code). These provisions read:
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
until their successors are elected and qualified.
xxxx
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy
occurring in the board of directors or trustees other than by removal by the
stockholders or members or by expiration of term, may be filled by the vote of
at least a majority of the remaining directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be filled by the stockholders in a
regular or special meeting called for that purpose. A director or trustee so

Africa claimed that a year after Makalintals election as member of the VVCC
Board in 1996, his [Makalintals] term as well as those of the other members
of the VVCC Board should be considered to have already expired. Thus,
according to Africa, the resulting vacancy should have been filled by the
stockholders in a regular or special meeting called for that purpose, and not by
the remaining members of the VVCC Board, as was done in this case.

Through a partial decision promulgated on January 23, 2002, the RTC ruled in
favor of Africa and declared the election of Ramirez, as Makalintals
replacement, to the VVCC Board as null and void.
Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the
election of Roxas as member of the VVCC Board, vice hold-over director
Dinglasan. While VVCC manifested its intent to appeal from the SECs ruling,
no petition was actually filed with the Court of Appeals; thus, the appellate
court considered the case closed and terminated and the SECs ruling final and
5
executory.
THE PETITION
VVCC now appeals to the Court to assail the RTCs January 23, 2002 partial
decision for being contrary to law and jurisprudence. VVCC made a direct
resort to the Court via a petition for review on certiorari, claiming that the sole
issue in the present case involves a purely legal question.
As framed by VVCC, the issue for resolution is whether the remaining directors
of the corporations Board, still constituting a quorum, can elect another
director to fill in a vacancy caused by the resignation of a hold-over director.
Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy
created by the resignation of a hold-over director is expressly granted to the
remaining members of the corporations board of directors.
Under the above-quoted Section 29 of the Corporation Code, a vacancy
occurring in the board of directors caused by the expiration of a members term
shall be filled by the corporations stockholders. Correlating Section 29 with

Section 23 of the same law, VVCC alleges that a members term shall be for
one year and until his successor is elected and qualified; otherwise stated,
a members term expires only when his successor to the Board is elected and
qualified. Thus, "until such time as [a successor is] elected or qualified in an
annual election where a quorum is present," VVCC contends that "the term of
[a member] of the board of directors has yet not expired."

THE COURTS RULING

We are not persuaded by VVCCs arguments and, thus, find its petition
unmeritorious.

As the vacancy in this case was caused by Makalintals resignation, not by the
expiration of his term, VVCC insists that the board rightfully appointed Ramirez
to fill in the vacancy.

To repeat, the issue for the Court to resolve is whether the remaining directors
of a corporations Board, still constituting a quorum, can elect another director
to fill in a vacancy caused by the resignation of a hold-over director. The
resolution of this legal issue is significantly hinged on the determination of what
constitutes a directors term of office.

In support of its arguments, VVCC cites the Courts ruling in the 1927 El
6
Hogar case which states:

The holdover period is not part of the term of office of a member of the board of
directors

Owing to the failure of a quorum at most of the general meetings since the
respondent has been in existence, it has been the practice of the directors to
fill in vacancies in the directorate by choosing suitable persons from among the
stockholders. This custom finds its sanction in Article 71 of the By-Laws, which
reads as follows:

The word "term" has acquired a definite meaning in jurisprudence. In several

cases, we have defined "term" as the time during which the officer may claim
to hold the office as of right, and fixes the interval after which the several
7
incumbents shall succeed one another. The term of office is not affected by
8
the holdover. The term is fixed by statute and it does not change simply
because the office may have become vacant, nor because the incumbent
holds over in office beyond the end of the term due to the fact that a successor
has not been elected and has failed to qualify.

Art. 71. The directors shall elect from among the shareholders members to fill
the vacancies that may occur in the board of directors until the election at the
general meeting.
xxxx
Upon failure of a quorum at any annual meeting the directorate naturally holds
over and continues to function until another directorate is chosen and qualified.
Unless the law or the charter of a corporation expressly provides that an office
shall become vacant at the expiration of the term of office for which the officer
was elected, the general rule is to allow the officer to hold over until his
successor is duly qualified. Mere failure of a corporation to elect officers does
not terminate the terms of existing officers nor dissolve the corporation. The
doctrine above stated finds expression in article 66 of the by-laws of the
respondent which declares in so many words that directors shall hold office "for
the term of one year or until their successors shall have been elected and
taken possession of their offices." xxx.
It results that the practice of the directorate of filling vacancies by the
action of the directors themselves is valid. Nor can any exception be taken
to the personality of the individuals chosen by the directors to fill vacancies in
the body. [Emphasis supplied.]
Africa, in opposing VVCCs contentions, raises the same arguments that he did
before the trial court.

Term is distinguished from tenure in that an officers "tenure" represents the

term during which the incumbent actually holds office. The tenure may be
shorter (or, in case of holdover, longer) than the term for reasons within or
beyond the power of the incumbent.
9

Based on the above discussion, when Section 23 of the Corporation Code

declares that "the board of directorsshall hold office for one (1) year until
their successors are elected and qualified," we construe the provision to mean
that the term of the members of the board of directors shall be only for one
year; their term expires one year after election to the office. The holdover
period that time from the lapse of one year from a members election to the
Board and until his successors election and qualification is not part of the
directors original term of office, nor is it a new term; the holdover period,
however, constitutes part of his tenure. Corollary, when an incumbent member
of the board of directors continues to serve in a holdover capacity, it implies
that the office has a fixed term, which has expired, and the incumbent is
10
holding the succeeding term.
After the lapse of one year from his election as member of the VVCC Board in
1996, Makalintals term of office is deemed to have already expired. That he
continued to serve in the VVCC Board in a holdover capacity cannot be
considered as extending his term. To be precise, Makalintals term of office
began in 1996 and expired in 1997, but, by virtue of the holdover doctrine in

Section 23 of the Corporation Code, he continued to hold office until his

resignation on November 10, 1998. This holdover period, however, is not to be
considered as part of his term, which, as declared, had already expired.
With the expiration of Makalintals term of office, a vacancy resulted which, by
11
the terms of Section 29 of the Corporation Code, must be filled by the
stockholders of VVCC in a regular or special meeting called for the purpose.
To assume as VVCC does that the vacancy is caused by Makalintals
resignation in 1998, not by the expiration of his term in 1997, is both illogical
and unreasonable. His resignation as a holdover director did not change the
nature of the vacancy; the vacancy due to the expiration of Makalintals term
had been created long before his resignation.
The powers of the corporations board of directors emanate from its
stockholders
VVCCs construction of Section 29 of the Corporation Code on the authority to
fill up vacancies in the board of directors, in relation to Section 23 thereof,
effectively weakens the stockholders power to participate in the corporate
governance by electing their representatives to the board of directors. The
board of directors is the directing and controlling body of the corporation. It is a
creation of the stockholders and derives its power to control and direct the
affairs of the corporation from them. The board of directors, in drawing to
themselves the powers of the corporation, occupies a position of trusteeship in
relation to the stockholders, in the sense that the board should exercise not
only care and diligence, but utmost good faith in the management of corporate
12
affairs.

While the Court in El Hogar approved of the practice of the directors to fill
vacancies in the directorate, we point out that this ruling was made before the
14
present Corporation Code was enacted and before its Section 29 limited the
instances when the remaining directors can fill in vacancies in the board, i.e.,
when the remaining directors still constitute a quorum and when the vacancy is
caused for reasons other than by removal by the stockholders or by expiration
of the term.1avvphi1
It also bears noting that the vacancy referred to in Section 29 contemplates a
vacancy occurring within the directors term of office. When a vacancy is
created by the expiration of a term, logically, there is no more unexpired term
to speak of. Hence, Section 29 declares that it shall be the corporations
stockholders who shall possess the authority to fill in a vacancy caused by the
expiration of a members term.
As correctly pointed out by the RTC, when remaining members of the VVCC
Board elected Ramirez to replace Makalintal, there was no more unexpired
term to speak of, as Makalintals one-year term had already expired. Pursuant
to law, the authority to fill in the vacancy caused by Makalintals leaving lies
with the VVCCs stockholders, not the remaining members of its board of
directors.
WHEREFORE, we DENY the petitioners petition for review on certiorari, and
AFFIRM the partial decision of the Regional Trial Court, Branch 152, Manila,
promulgated on January 23, 2002, in Civil Case No. 68726. Costs against the
petitioners.
SO ORDERED.

The underlying policy of the Corporation Code is that the business and affairs
of a corporation must be governed by a board of directors whose members
have stood for election, and who have actually been elected by the
stockholders, on an annual basis. Only in that way can the directors' continued
accountability to shareholders, and the legitimacy of their decisions that bind
the corporation's stockholders, be assured. The shareholder vote is critical to
the theory that legitimizes the exercise of power by the directors or officers
13
over properties that they do not own.
This theory of delegated power of the board of directors similarly explains why,
under Section 29 of the Corporation Code, in cases where the vacancy in the
corporations board of directors is caused not by the expiration of a members
term, the successor "so elected to fill in a vacancy shall be elected only for the
unexpired term of the his predecessor in office." The law has authorized the
remaining members of the board to fill in a vacancy only in specified instances,
so as not to retard or impair the corporations operations; yet, in recognition of
the stockholders right to elect the members of the board, it limited the period
during which the successor shall serve only to the "unexpired term of his
predecessor in office."

ARTURO D. BRION
Associate Justice

G.R. No. 153468

August 17, 2006

PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN CO,

JAMES TAN, JUDITH TAN, ERNESTO TANCHI JR., EDWIN NGO, VIRGINIA
KHOO, SABINO PADILLA JR., EDUARDO P. LIZARES and GRACE
CHRISTIAN HIGH SCHOOL, Petitioners,
vs.
PAUL SYCIP and MERRITTO LIM, Respondents.
DECISION
PANGANIBAN, CJ.:
For stock corporations, the "quorum" referred to in Section 52 of the
Corporation Code is based on the number of outstanding voting stocks. For
nonstock corporations, only those who are actual, living members with voting
rights shall be counted in determining the existence of a quorum during
members meetings. Dead members shall not be counted.
The Case

[1]

The present Petition for Review on Certiorari under Rule 45 of the Rules of
2
3
Court seeks the reversal of the January 23 and May 7, 2002, Resolutions of
the Court of Appeals (CA) in CA-GR SP No. 68202. The first assailed
Resolution dismissed the appeal filed by petitioners with the CA. Allegedly,
without the proper authorization of the other petitioners, the Verification and
Certification of Non-Forum Shopping were signed by only one of them -- Atty.
Sabino Padilla Jr. The second Resolution denied reconsideration.

Atty. Sabino Padilla Jr. No Special Power of Attorney had been attached to
show his authority to sign for the rest of the petitioners.
Hence, this Petition.

16

Issues
Petitioners state the issues as follows:

The Facts
Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit
educational corporation with fifteen (15) regular members, who also constitute
[4]
the board of trustees. During the annual members meeting held on April 6,
[5]
1998, there were only eleven (11)
living member-trustees, as four (4) had
6
already died. Out of the eleven, seven (7) attended the meeting through their
respective proxies. The meeting was convened and chaired by Atty. Sabino
Padilla Jr. over the objection of Atty. Antonio C. Pacis, who argued that there
7
was no quorum. In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo,
Virginia Khoo, and Judith Tan were voted to replace the four deceased
member-trustees.
When the controversy reached the Securities and Exchange Commission
(SEC), petitioners maintained that the deceased member-trustees should not
be counted in the computation of the quorum because, upon their death,
members automatically lost all their rights (including the right to vote) and
interests in the corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null
and void for lack of quorum. She held that the basis for determining the
quorum in a meeting of members should be their number as specified in the
8
articles of incorporation, not simply the number of living members.
She
9
explained that the qualifying phrase "entitled to vote" in Section 24 of the
Corporation Code, which provided the basis for determining a quorum for the
10
election of directors or trustees, should be read together with Section 89.

"Petitioners principally pray for the resolution of the legal question of whether
or not in NON-STOCK corporations, dead members should still be counted in
determination of quorum for purposed of conducting the Annual Members
Meeting.
"Petitioners have maintained before the courts below that the DEAD members
should no longer be counted in computing quorum primarily on the ground that
members rights are personal and non-transferable as provided in Sections 90
and 91 of the Corporation Code of the Philippines.
"The SEC ruled against the petitioners solely on the basis of a 1989 SEC
Opinion that did not even involve a non-stock corporation as petitioner GCHS.
"The Honorable Court of Appeals on the other hand simply refused to resolve
this question and instead dismissed the petition for review on a technicality
the failure to timely submit an SPA from the petitioners authorizing their copetitioner Padilla, their counsel and also a petitioner before the Court of
Appeals, to sign the petition on behalf of the rest of the petitioners.
"Petitioners humbly submit that the action of both the SEC and the Court of
Appeals are not in accord with law particularly the pronouncements of this
Honorable Court in Escorpizo v. University of Baguio (306 SCRA 497), Robern
Development Corporation v. Quitain (315 SCRA 150,) and MC Engineering,
Inc. v. NLRC, (360 SCRA 183). Due course should have been given the
17
petition below and the merits of the case decided in petitioners favor."

11

The hearing officer also opined that Article III (2) of the By-Laws of GCHS,
insofar as it prescribed the mode of filling vacancies in the board of trustees,
12
must be interpreted in conjunction with Section 29 of the Corporation Code.
The SEC en banc denied the appeal of petitioners and affirmed the Decision of
13
the hearing officer in toto. It found to be untenable their contention that the
14
word "members," as used in Section 52
of the Corporation Code, referred
15
only to the living members of a nonstock corporation.

In sum, the issues may be stated simply in this wise: 1) whether the CA erred
in denying the Petition below, on the basis of a defective Verification and
Certification; and 2) whether dead members should still be counted in the
determination of the quorum, for purposes of conducting the annual members
meeting.
The Courts Ruling

As earlier stated, the CA dismissed the appeal of petitioners, because the

Verification and Certification of Non-Forum Shopping had been signed only by

The present Petition is partly meritorious.

Procedural Issue:
Verification and Certification of Non-Forum Shopping
The Petition before the CA was initially flawed, because the Verification and
Certification of Non-Forum Shopping were signed by only one, not by all, of the
petitioners; further, it failed to show proof that the signatory was authorized to
sign on behalf of all of them. Subsequently, however, petitioners submitted a
Special Power of Attorney, attesting that Atty. Padilla was authorized to file the
18
action on their behalf.
In the interest of substantial justice, this initial procedural lapse may be
19
excused. There appears to be no intention to circumvent the need for proper
verification and certification, which are aimed at assuring the truthfulness and
correctness of the allegations in the Petition for Review and at discouraging
20
forum shopping.
More important, the substantial merits of petitioners case
and the purely legal question involved in the Petition should be considered
21
special circumstances or compelling reasons that justify an exception to the
strict requirements of the verification and the certification of non-forum
22
shopping.

While stockholders and members (in some instances) are entitled to receive
profits, the management and direction of the corporation are lodged with their
26
representatives and agents -- the board of directors or trustees.
In other
words, acts of management pertain to the board; and those of ownership, to
the stockholders or members. In the latter case, the board cannot act alone,
27
but must seek approval of the stockholders or members.
Conformably with the foregoing principles, one of the most important rights of a
qualified
shareholder
or
member
is
the
right
to vote -- either personally or by proxy -- for the directors or trustees who are to
28
manage the corporate affairs.
The right to choose the persons who will
direct, manage and operate the corporation is significant, because it is the
main way in which a stockholder can have a voice in the management of
corporate affairs, or in which a member in a nonstock corporation can have a
29
say on how the purposes and goals of the corporation may be achieved.
Once the directors or trustees are elected, the stockholders or members
relinquish corporate powers to the board in accordance with law.
In the absence of an express charter or statutory provision to the contrary, the
general rule is that every member of a nonstock corporation, and every legal
owner of shares in a stock corporation, has a right to be present and to vote in
all corporate meetings. Conversely, those who are not stockholders or
30
members have no right to vote.
Voting may be expressed personally, or
31
through proxies who vote in their representative capacities.
Generally, the
right to be present and to vote in a meeting is determined by the time in which
32
the meeting is held.
Section 52 of the Corporation Code states:

Main Issue:
Basis for Quorum
Generally, stockholders or members meetings are called for the purpose of
23
electing directors or trustees and transacting some other business calling for
24
or requiring the action or consent of the shareholders or members, such as
the amendment of the articles of incorporation and bylaws, sale or disposition
of all or substantially all corporate assets, consolidation and merger and the
like, or any other business that may properly come before the meeting.
Under the Corporation Code, stockholders or members periodically elect the
board of directors or trustees, who are charged with the management of the
25
corporation.
The board, in turn, periodically elects officers to carry out
management functions on a day-to-day basis. As owners, though, the
stockholders or members have residual powers over fundamental and major
corporate changes.

"Section 52. Quorum in Meetings. Unless otherwise provided for in this Code
or in the by-laws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock or a majority of the members in the
case of non-stock corporations."
In stock corporations, the presence of a quorum is ascertained and counted on
the basis of the outstanding capital stock, as defined by the Code thus:
"SECTION 137. Outstanding capital stock defined. The term outstanding
capital stock as used in this Code, means the total shares of stock issued
under binding subscription agreements to subscribers or stockholders, whether
or not fully or partially paid, except treasury shares." (Underscoring supplied)
The Right to Vote in Stock Corporations
The right to vote is inherent in and incidental to the ownership of corporate
33
stocks. It is settled that unissued stocks may not be voted or considered in

determining whether a quorum is present in a stockholders meeting, or

whether a requisite proportion of the stock of the corporation is voted to adopt
a certain measure or act. Only stock actually issued and outstanding may be
34
voted.
Under Section 6 of the Corporation Code, each share of stock is
entitled to vote, unless otherwise provided in the articles of incorporation or
35
declared delinquent under Section 67 of the Code.
Neither the stockholders nor the corporation can vote or represent shares that
have never passed to the ownership of stockholders; or, having so passed,
36
have again been purchased by the corporation. These shares are not to be
taken into consideration in determining majorities. When the law speaks of a
given proportion of the stock, it must be construed to mean the shares that
37
have passed from the corporation, and that may be voted.
Section 6 of the Corporation Code, in part, provides:

7. Investment of corporate funds in another corporation or business in

accordance with this Code; and
8. Dissolution of the corporation.
"Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this Code shall
be deemed to refer only to stocks with voting rights."
Taken in conjunction with Section 137, the last paragraph of Section 6 shows
that the intention of the lawmakers was to base the quorum mentioned in
38
Section 52 on the number of outstanding voting stocks.
The Right to Vote in Nonstock Corporations
39

"Section 6. Classification of shares. The shares of stock of stock corporations

may be divided into classes or series of shares, or both, any of which classes
or series of shares may have such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided, That no share may be deprived
of voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code: Provided,
further, that there shall always be a class or series of shares which have
complete voting rights.
xxxxxxxxx
"Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled
to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;

In nonstock corporations, the voting rights attach to membership. Members

vote as persons, in accordance with the law and the bylaws of the corporation.
Each member shall be entitled to one vote unless so limited, broadened, or
40
denied in the articles of incorporation or bylaws.
We hold that when the
principle for determining the quorum for stock corporations is applied by
analogy to nonstock corporations, only those who are actual members with
voting rights should be counted.
Under Section 52 of the Corporation Code, the majority of the members
representing
the
actual
number
of
voting
rights,
not
the number or numerical constant that may originally be specified in the articles
41
of incorporation, constitutes the quorum.
42

The March 3, 1986 SEC Opinion cited by the hearing officer uses the phrase
"majority vote of the members"; likewise Section 48 of the Corporation Code
refers to 50 percent of 94 (the number of registered members of the
association mentioned therein) plus one. The best evidence of who are the
present members of the corporation is the "membership book"; in the case of
43
stock corporations, it is the stock and transfer book.
Section 25 of the Code specifically provides that a majority of the directors or
trustees, as fixed in the articles of incorporation, shall constitute a quorum for
the transaction of corporate business (unless the articles of incorporation or the
bylaws provide for a greater majority). If the intention of the lawmakers was to
base the quorum in the meetings of stockholders or members on their absolute
number as fixed in the articles of incorporation, it would have expressly
specified so. Otherwise, the only logical conclusion is that the legislature did
not have that intention.
Effect of the Death of a Member or Shareholder

Having thus determined that the quorum in a members meeting is to be

reckoned as the actual number of members of the corporation, the next
question to resolve is what happens in the event of the death of one of them.
In stock corporations, shareholders may generally transfer their shares. Thus,
on the death of a shareholder, the executor or administrator duly appointed by
the Court is vested with the legal title to the stock and entitled to vote it. Until a
settlement and division of the estate is effected, the stocks of the decedent are
44
held by the administrator or executor.
On the other hand, membership in and all rights arising from a nonstock
corporation are personal and non-transferable, unless the articles of
45
incorporation or the bylaws of the corporation provide otherwise.
In other
words, the determination of whether or not "dead members" are entitled to
exercise their voting rights (through their executor or administrator), depends
on those articles of incorporation or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall, among
46
others, be terminated by the death of the member.
Section 91 of the
Corporation Code further provides that termination extinguishes all the rights of
a member of the corporation, unless otherwise provided in the articles of
incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead members who are
dropped from the membership roster in the manner and for the cause provided
for in the By-Laws of GCHS are not to be counted in determining the requisite
vote in corporate matters or the requisite quorum for the annual members
meeting. With 11 remaining members, the quorum in the present case should
be 6. Therefore, there being a quorum, the annual members meeting,
47
conducted with six members present, was valid.
Vacancy in the Board of Trustees
As regards the filling of vacancies in the board of trustees, Section 29 of the
Corporation Code provides:
"SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy
occurring in the board of directors or trustees other than by removal by the
stockholders or members or by expiration of term, may be filled by the vote of
at least a majority of the remaining directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be filled by the stockholders in a
regular or special meeting called for that purpose. A director or trustee so
elected to fill a vacancy shall be elected only for the unexpired term of his
predecessor in office."

Undoubtedly, trustees may fill vacancies in the board, provided that those
remaining still constitute a quorum. The phrase "may be filled" in Section 29
shows that the filling of vacancies in the board by the remaining directors or
48
trustees constituting a quorum is merely permissive, not mandatory.
Corporations, therefore, may choose how vacancies in their respective boards
may be filled up -- either by the remaining directors constituting a quorum, or
by the stockholders or members in a regular or special meeting called for the
49
purpose.
The By-Laws of GCHS prescribed the specific mode of filling up existing
vacancies in its board of directors; that is, by a majority vote of the remaining
50
members of the board.
While a majority of the remaining corporate members were present, however,
the "election" of the four trustees cannot be legally upheld for the obvious
reason that it was held in an annual meeting of the members, not of the board
of trustees. We are not unmindful of the fact that the members of GCHS
themselves also constitute the trustees, but we cannot ignore the GCHS bylaw
provision, which specifically prescribes that vacancies in the board must be
filled up by the remaining trustees. In other words, these remaining membertrustees must sit as a board in order to validly elect the new ones.
Indeed, there is a well-defined distinction between a corporate act to be done
by the board and that by the constituent members of the corporation. The
board of trustees must act, not individually or separately, but as a body in a
lawful meeting. On the other hand, in their annual meeting, the members may
be represented by their respective proxies, as in the contested annual
members meeting of GCHS.
WHEREFORE, the Petition is partly GRANTED.The assailed Resolutions of
the Court of Appeals are hereby REVERSED AND SET ASIDE. The remaining
members of the board of trustees of Grace Christian High School (GCHS) may
convene and fill up the vacancies in the board, in accordance with this
Decision. No pronouncement as to costs in this instance.
SO ORDERED.
ARTEMIO V. PANGANIBAN
Chief Justice
Chairperson, First Division

G.R. No. 132981

August 31, 2004

MAMITUA SABER, substituted by his HEIRS, represented by ORFIA

ALICER SABER, petitioners,
vs.
COURT OF APPEALS, PHILIPPINE AMANAH BANK and ASGARI ARADJI,
respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari filed by the heirs of Dr. Mamitua Saber
1
of the Decision of the Court of Appeals in CA-G.R. CV No. 22626 reversing
2
the Decision of the Regional Trial Court of Marawi City, Branch 9, in Civil

Case No. 2323 (84-R), as well as the Resolution of the appellate court denying
the motion for reconsideration thereof.
The Antecedents

the same. This included Lugum Uka, as Vice-Chairman, and Alexander

6
Lucman, as member. On October 4, 1974, Saber issued another
Memorandum delineating the specific duties of the Secretariat members who
7
were joining the trip.

On April 8, 1974 then President Ferdinand E. Marcos appointed Dr. Mamitua

Saber, then Dean of Research at the Mindanao State University and Acting
Director, National Science Museum, as Executive Vice-President of the
3
Philippine Amanah Bank (PAB). He was also designated as the Officer-inCharge of the bank pending the election of its president by the Board of
Directors. Saber was surprised because he did not apply for appointment to
the position. He inquired from Executive Secretary Alejandro Melchor why he
was appointed thereto, considering that he had no experience whatsoever in
the field of business and banking. He was told that he was chosen by the
President from among forty applicants because of his proven personal
integrity. Saber took a year-long leave of absence from the university and
assumed office at the PAB. From the serenity of the academe, he plunged
head-on into the turbulent and intricate world of business.

Saber decided to charter the M/V Sweet Homes, owned by the Sweet Lines,
Inc., for the trip. In behalf of the PAB, as charter, Saber executed a Uniform
Time-Charter on October 15, 1974 under which the PAB chartered the M/V
Sweet Homes to transport the pilgrims to Mecca and back to the Philippines for
8
P5,300,000 cash, the amount budgeted by the PAB. The parties executed a
Rider to Charter Party in which the PAB was allowed to load cargoes in the
9
cargo hold of the vessel up to 500 metric tons free of freight. The vessel was
scheduled to leave on November 28, 1974. There was no time to lose; the PAB
conducted a massive information drive to inform the Muslims of the
arrangements, including the accommodations on board the vessel and urged
them to join the Hajj through the bank. Prospective pilgrims, including PAB
depositors, made reservations for the voyage and made partial payments for
their tickets thereon.

One of the members of the Board of Directors of the bank was Asgari Aradji
who was also the Acting Chairman of the Screening Committee for Personnel.
Martin Saludo, then Senior Vice-President of the Philippine National Bank
(PNB), was a management consultant of the PAB.

On October 25, 1974, Saber wrote then President Marcos requesting that other
parties not be allowed to charter any ship or aircraft bringing pilgrims to
10
Jeddah, to avoid unfair competition with the PAB. However, President
Marcos granted Congressman Ali Dimaporo and some politicians from Lanao
del Sur permission to charter a plane to transport the pilgrims. Worse, Sacar
Basman, the General Manager of the Arabian Gulf Export Agency Corporation
(AGEAC) had been representing to the public that he was one of the
Pilgrimage Directors, that he had been allotted 25 passengers for the voyage
on board the M/V Sweet Homes and solicited fare payments from interested
11
pilgrims.

Saber was sent to Malaysia to study how its Malaysian government prepared
and managed the annual Muslim pilgrimage (Hajj) to Mecca, and thus, avoid
the fiascos that plagued previous such pilgrimages of Filipino Muslims in the
past. After his stint in Malaysia, Saber resumed his duties at the PAB.
In a Letter dated September 19, 1974, Executive Secretary Alejandro Melchor
informed Chairman of the PAB Board of Directors Dr. Cesar A. Majul, that the
bank had been designated to make appropriate preparations and
4
arrangements for the annual pilgrimage of Filipino Muslims to Mecca. The
next day, Majul forwarded the letter to Saber, directing the latter to undertake
5
the appropriate arrangements for the pilgrimage. Saber was concerned
because he had only two months to prepare; the pilgrims had to be in Mecca in
time for the one-day ceremony at Mt. Arafat on December 23, 1974.
Considering that Saber had no experience thereon, the PAB Board of Directors
designated Saludo as the head of the one-man oversight committee to oversee
the preparations.
Saber issued Office Memorandum No. 92 forming a Pilgrimage Secretariat with
the following officers: Atty. Lanang S. Ali, as Chairman and Pilgrimage
Administrator; Dialel Basman, as Finance Officer; and Kuisan Go, as Trade
and Investment Officer. Saber later issued Office Order No. 95, designating ten
(10) members of the Secretariat who would join the pilgrimage and coordinate

On November 8, 1974, Indar Tampi, the Marawi Branch Manager of the PAB,
wrote Saber expressing his disappointment over the turn of events politicians
being allowed to charter a private plane which was in direct competition with
the PAB. He stated that this could derail the success of the pilgrimage and
cause great financial loss to the bank. He also expressed his apprehensions
about the representations of Sacar Basman that he was one of pilgrimage
directors, and that he was allotted 25 accommodations on the M/V Sweet
12
Homes. Tampi sent a telegram to Saber on November 14, 1974 informing the
latter that many prospective passengers, including 120 depositors of the PAB
who were booked for the voyage on board the M/V Sweet Homes, had
st
nd
withdrawn their reservations. Furthermore, about 200 1 and 2 class cabin
13
accommodations were rendered vacant. When he learned of the foregoing
developments, President Marcos was alarmed and ordered that pilgrims going
14
to Mecca by plane be limited to 100 passengers.
In November 1974, Saber formed a three-man panel called the "Troika,"
composed of Atty. Lanang Ali, Dialel Basman and Ibrahim Mamao, to

coordinate the arrangements for the pilgrimage. Rather than allow the vessel to
leave for Mecca with many vacant cabins, Saber decided to sell tickets to
15
Basman on credit. He issued a Memorandum on November 21, 1974,
informing the Troika that he had reached an agreement with Basman that the
latter would purchase forty (40) first class (ordinary) cabin accommodations
and thirty (30) second class (dormitory) accommodations on board the M/V
Sweet Homes, and that Basman would pay via a postdated check. Saber
directed the Troika to implement the agreement. Saber issued a supplemental
memorandum to the Secretariat ordering it as follows:
[T]o give and issue on credit purchase basis additional One
Hundred Twenty (120) fare tickets all of first class accommodations at
P6,500.00 each under the following terms and conditions, tax FREE;
1. The said fare tickets all first class accommodations at
P6,500.00 each in the total sum of SEVEN HUNDRED FIFTYSIX THOUSAND (P756,000.00) PESOS, Philippine Currency,
shall consist of the unsold tickets and the same shall be given
and issued to Datu Sacar Basman on credit purchase basis.
2. The said sum of P756,000.00 shall be paid by means of
post-dated check issued by Datu Sacar Basman in favor of the
16
Philippine Amanah Bank.
In a parallel development, Atty. Mangawan Toro, the Legal Counsel of the
PAB, prepared a Freight Contract which the PAB, through Saber, and the
AGEAC, through Basman, its General Manager, executed without the approval
of the PAB Board of Directors. Under the contract, AGEAC was allowed to load
on the M/V Sweet Homes chartered by the PAB, exportable/importable goods
and other cargoes on its trip to Saudi Arabia and return, in consideration of
P178,000 to be paid by AGEAC via a postdated check, under the following
terms and conditions:
7. That the PARTY OF THE SECOND PART will pay, and hand in and
deliver the payment of the consideration referred to above within a
period of ten (10) days from and after arrival in the Philippines in its
return home trip.
8. That as a security for the payment of the freight agreed upon, the
PARTY OF THE SECOND PART hereby agrees that the PARTY OF
THE FIRST PART shall have a superior lien in the proceeds on the
sale of the goods evidenced by the bill of lading, invoices and other
17
documents and/or on the goods in case no sale is made.
On the other hand, Saber stated in his Memo-Directives in the Secretariat that
in connection with the Freight Contract with AGEAC

4. The proceeds of the exported goods sold shall be placed in the

possession of the PAB Treasurer or his authorized representative
which shall be made available to Datu Sacar Basman for use in
payment for goods to be imported; likewise, the proceeds derived from
the sale of the imported goods shall be kept by the said Treasurer or
his authorized representative and all sums indicated in the postdated
check/s issued by Datu Sacar Basman be deducted therefrom and/or
whatever amount or sums of money due to the bank as embodied in
the memo-directive of November 21, 1974 and in this addendum,
18
likewise, in other contracts signed by the parties herein.
Although they believed that the agreements of Saber with Basman/AGEAC
were against the policies of the PAB, the Troika/Secretariat had to implement
the Memoranda, and because of Sabers insistence, gave the tickets to
Basman. In payment thereof, Basman drew and issued PAB Check Nos.
00377 and 00378, both postdated February 4, 1975 against his account No.
19
10000008 payable to PAB with no amounts written thereon. Basman loaded
exportable goods on board the vessel. When the vessel arrived in Saudi
Arabia, the authorities did not allow the M/V Sweet Homes to dock. Its
passengers were boarded on boats and transported to the pier. Basman failed
to unload and sell the exportable goods, much less purchase importable
goods. When the postdated checks were deposited on the due dates thereof in
20
the account of the PAB, they were dishonored. Basman, likewise, failed to
pay for the freight charge for the exportable cargo of AGEAC to Saudi Arabia.
Consequently, the PAB sustained a huge financial loss.
PAB Auditor Aramis Aguilar submitted his Report of the Accounts Receivables
in connection with the pilgrimage in the total amount of P1,033,700, thus:
SCHEDULE OF RECEIVABLES
I. For Tickets Sold:
1. Sacar Basman

P654,000.00

2. 78 Passengers (Surrenderees)
sponsored by PC Authorities

296,400.00

3. Eight (8) persons guaranteed by

Ambassador L. Pangandaman

49,600.00

4. Nascuin Dakinangcob

1,700.00

5. Acmad Buat

2,700.00

6. Ali Usman

3,800.00

7. Ali Laguindab

3,800.00

Sub-total

P1,012,000.00

the positions; other[s] were terminated despite the fact that they are
more deserving than those who were retained.
These instances clearly indicate the apparent lack of exercise of
effective leadership which is so vital and essential at this crucial stage
if we are to make the Amanah Bank truly responsive to the needs of
our Muslim brothers. Moreover, the purpose for which Dr. Namitua
Saber has been designated as OIC have already been accomplished
and such designation has become academic with the constitution of
22
the PAB Board of Directors.

II. For Mutawiff:

1. Cosain Ali Usman

900.00

2. Surrenderees assessed by the

PC Authorities

13,600.00

3.
Eight
(8)
Passengers
guaranteed by Ambassador L.
Pangandaman

7,200.00

Sub-total

P 21,700.00

TOTAL RECEIVABLES

P 1,033,700.00

21

During the meeting of the PAB Board of Directors, Saber was present. The
Board, after exhaustive deliberations, approved Resolution No. 67, Series of
1975, without any objection, declaring Saber liable for the receivables on the
ground that the Board did not authorize him to sell tickets on credit payable via
postdated checks, and to execute the Freight Contract with AGEAC. The
Board directed Saber to collect the receivables himself, because of its
perception that if the PAB endeavored to collect the receivables, it would,
thereby, be ratifying the unauthorized acts of Saber.
PAB Director Asgari A. Aradji, who was also Acting Chairman of the Personnel
Screening Committee of the PAB, made verbal representations to the PAB
Board of Directors to grant PAB Management Consultant and PAB Senior
Vice-President Martin L. Saludo the power to perform the duties and exercise
the powers of PAB President, in lieu of Saber who was only the Officer-inCharge. He issued a Memorandum to the Board of Directors, through the
Chairman of the Board, on February 21, 1975 reiterating his proposal. He
explained the following therein:
Specifically, I refer to the mishandling of the 1974 MECCA Pilgrimage.
The Board set a budget of P5.53 million but the incumbent OIC
authorized a total disbursement of P9.157 million or an excess of
P3.62 million.
As Chairman of the Personnel Screening Committee, I have
discovered, much to my surprise, that a number of employees have
been retained in spite their not having the necessary qualifications for

Meanwhile, Sabers leave of absence at the Mindanao State University expired

and he had to report back to the university. He applied for a clearance from the
PAB. Assistant Auditor Rodolfo Ocampo signed the said clearance for and in
behalf of Auditor Aramis Aguilar, subject to Resolution No. 67, Series of 1975
of the PAB Board of Directors. Because of the conditional clearance issued by
the PAB, Saber was reinstated to his position as professor at the university
with the salary of P34,000.00 per annum, but not to his former position as
Dean for Research.
On May 6, 1975, the PAB Board of Directors approved Resolution No. 92
confirming the recommendation of the management of the bank for the
creation of an Investigating Committee of five (5) members, chaired by Aradji,
to look into the administrative and/or criminal liabilities of the persons involved
23
in the Pilgrimage Project. It also resolved that pending the outcome of the
24
investigation, Saber be given only a conditional clearance.
During the formal investigation, Saber testified and submitted documentary
evidence. Aradji submitted his Report to the PAB Board of Directors that there
was basis for Saber to be charged with violation of Republic Act No. 3019,
otherwise known as the Anti-Graft and Corrupt Practices Act, and
recommended that the proper criminal complaint be filed against him. The
management approved the recommendation of Aradji.
On July 10, 1975, the Board of Directors of the PAB approved Resolution No.
155 confirming the recommendation of the PAB Management based on the
Report of the Investigating Committee headed by Aradji. The resolution
authorized the filing of a criminal complaint against Saber for violation of Rep.
Act No. 3019, and for Aradji to sign the said complaint and testify against
Saber:
1. That a criminal case for violation of the provisions of the Anti-Graft
and Corrupt Practices Act (Republic Act 3019) be filed against Dr.
Mamitua Saber and that Director Asgari A. Aradji, Chairman,
Investigation Committee, 1974 Mecca Pilgrimage Project be
authorized, as he is hereby authorized to sign for and in behalf of the

Bank the complaint against Dr. Mamitua Saber and thereafter to testify
and represent the Bank. Should sufficient evidence be found later to
prove conspiracy in the preparation and execution of the Freight
Contract, the memorandum and the addendum thereto mentioned
above, that Messrs. Lanang Ali, Magawan Doro, Dialel Basman and
25
other persons involved be included as respondents;

1. Declaring PAB Boards Resolution No. 67, Series of 1975 (Annex

D) null and void;

Pursuant thereto, Aradji signed the criminal complaint filed with the Office of
the City Fiscal of Zamboanga City against Saber for violation of Rep. Act No.
3019. The case was docketed as Slip No. 527-75. The complaint, as well as
the report on the investigation of Saber, was the subject of a news item in the
Times Journal, a newspaper of general circulation under the by-line of reporter
26
Emilio Macaspac.

3. Ordering defendant, jointly and severally in their official and/or

personal capacity, to pay plaintiff, the following:

On October 6, 1975, Saber filed a civil complaint for damages in the RTC of
27
Marawi City, Branch 9, against the PAB, the Chairman and the members of
its Board of Directors, its Managing Director Martin Saludo, Auditor Aramis
Aguilar, and Assistant Auditor Rodolfo Ocampo. Saber alleged therein that the
PAB was authorized to make the appropriate arrangements for the pilgrimage;
he had the implied authority to enter into transactions, including the authority to
sell the tickets to Basman on credit and to execute the Freight Contract with
AGEAC. He pointed out that Martin Saludo, who was appointed by the Board
of Directors to oversee the preparation of the pilgrimage, approved the said
transactions; hence, he is not personally liable for the receivables of
P1,033,700. He alleged that the defendants therein acted arbitrarily,
oppressively and unfairly in considering the receivables in connection with the
pilgrimage as his personal obligation and in approving Resolution No. 67. He
further averred that the conditional clearance made by Ocampo and Aguilar
caused him great damage and prejudice, and that the filing of the anti-graft
charges against him by the PAB and its Board of Directors was devoid of any
factual and legal basis. He claimed that the filing of the charges, the nationwide
publication thereof at the behest of the PAB, and the press release of the
Investigating Committees report and the complaint caused him dishonor,
shame, discredit and contempt, shock, besmirched reputation, and wounded
feelings, for which the defendants were liable for moral, exemplary and actual
damages. He also alleged that because of his preventive suspension, he failed
to receive his salary from the Mindanao State University, causing him and his
family severe economic losses. He further claimed that Aradji and Saludo
conspired to oust him from the PAB.
Saber, thereafter, prayed that, after due proceedings, judgment be rendered in
his favor:
WHEREFORE, it is respectfully prayed that judgment be rendered in
favor of plaintiff and against defendants, as follows:

2. Ordering the deletion of the questioned notation Subject to Board

Resolution No. 67, Series of 1975 contained in the Certificate of
Clearance (Annex E);

1. The amount of no less than P1,000,000.00 as and for moral

damages;
2. The amount of no less than P3,650.00 monthly from July
1975, until plaintiff shall have resumed his position in the
Mindanao State University;
3. The amount of no less than P100,000.00 as nominal
damages;
4. A reasonable amount to be determined by the Honorable
Court, as and for exemplary damages;
5. Attorneys fees in the amount equivalent to 25% of whatever
amount is awarded by the Honorable Court in favor of the
plaintiff.
Plaintiff further prays for such other and further relief as this Honorable
28
Court may deem just and equitable in the premises.
On motion of Saber, the complaint was dismissed as against the chairman and
29
members of the PAB Board of Directors.
The remaining defendants therein, the PAB and Aradji, alleged the following in
their Answer: Saber sold tickets on credit to Basman payable via postdated
checks without authority from the PAB Board of Directors; defendant Martin
Saludo approved in principle the lease of the cargo spaces in the M/V Sweet
Home, but subject to the approval of the PAB Board of Directors; the said
lease contract, including the Freight Contract with AGEAC, was never
approved by the PAB Board of Directors; the PAB had no obligation to issue a
clearance to Saber, and it would have been injudicious it to have done so on
account of Sabers unpaid personal obligations to the bank; contrary to Sabers
claim, there were factual and legal bases for the approval of Resolution No. 67
and the filing of the graft charges against him; Saber made no allegations in
the complaint that they (the defendants therein) caused or in any way
participated in the publication of the charges filed by the PAB against him; and,

the defendants acted in good faith, in the performance of their duties in the
filing of the complaint in violation of Section 3, Rep. Act No. 3019.
On December 9, 1975, the Board of Trustees of the MSU approved Resolution
No. 969, Series of 1975, approving the reinstatement of Saber to his former
position as Dean of Research, with the corresponding salary effective from the
30
date he would report for work.
After a preliminary investigation, Special Counsel Genaro T. Lorena, Jr. of the
Office of the City Fiscal issued a Resolution dismissing the complaint in Slip
31
No. 527-75. The petition for review thereon filed by the PAB was dismissed
32
on August 2, 1978. However, upon review by the Tanodbayan, the resolution
of the Special Counsel was reversed with the following recommendation:
The undersigned finds and so holds that there exists a prima facie
case for violation of Sec. 3, par. (e) on three (3) counts (on the basis of
the memoranda of November 21 and 28, 1974, and that of the freight
contract, respectively) of the Anti-Graft Law against respondents
MAMITUA SABER, LANANG ALI, DIALEL BASMAN, IBRAHIM
MAMAO, TINDUG MACARAMBON, IBRAHIM MACADATAR and
SACAR BASMAN, and that they are probably guilty thereof.
Accordingly, it is recommended that the corresponding informations for
33
Violation of the Anti-Graft Law be filed against respondents.
Three Informations were filed against Saber, Sacar Basman, Lanang Ali, Dialel
Basman, Ibrahim Mamao, Tindug Macarambon and Ibrahim Macadatar in the
Sandiganbayan for violation of Section 3(e) of Rep. Act No. 3019. The cases
34
were docketed as Criminal Cases Nos. 1835 to 1837. Saber was preventively
suspended by the Sandiganbayan as required by law.
After trial, the Sandiganbayan rendered a Decision on January 6, 1982
35
acquitting all the accused.
In acquitting Saber of the charge, the
Sandiganbayan ruled:
It is of no legal consequence that both the MEMORANDUM and the
ADDENDUM were not approved by the Board of Directors of the
BANK. For one thing, it is not the absence of such approval that made
the transactions subject of both documents criminal under the
penalizing Act but whether they caused undue injury to the BANK or
gave unwarranted benefits, advantage or preference to Sacar Basman
through manifest partiality, evident bad faith or gross inexcusable
negligence of the accused BANK officials, which the court believes did
not. For another thing, the time element and the fact that the members
of the Board were themselves responsible officials of different
government offices precluded convening them to a meeting for that
purpose. And still for another thing, Dr. Saber, who was then the

Executive Vice President and Officer-in-Charge of the BANK and

entrusted with the management of the Pilgrimage Project must be
deemed to have been impliedly clothed with authority to enter into any
contract related to the Project. A corporate officer, entrusted with the
general management and control of its business, has implied authority
to make any contract or do any other act which is necessary or
appropriate to the conduct of the ordinary business of the corporation.
(Board of Liquidators vs. Kalaw, supra, citing 2 Fletcher Cyclopedia
36
Corporations, p. 607.)
On February 11, 1989, the RTC rendered a Decision in Civil Case No. 2323 in
favor of Saber, and against the PAB and Aradji, thus:
WHEREFORE, for all the foregoing findings, judgment is hereby
rendered in favor of plaintiff and against defendants, as follows:
1. Ordering defendant Philippine Amanah Bank jointly and severally
with defendant Asgari Aradji, to pay plaintiff the amounts of:
a. Nine Hundred Thousand (P900,000.00) Pesos as moral
damages;
b. One Hundred Thousand (P100,000.00) Pesos as nominal
damages;
c. Seventy Thousand (P70,000.00) Pesos as and for
Attorneys fee; and
d. The costs of suit.
SO ORDERED.

37

The trial court ruled that the PAB and Aradji were liable for damages based on
the following:
...(1) Malicious Prosecution of the criminal cases against plaintiff; (2)
Libel arising from derogatory and malicious publications against
plaintiff; and (3) willful injury against plaintiff under the provisions of the
New Civil Code on Human Relations, arising from Resolution No. 67,
38
Series of 1975 and the conditional clearance in question.
The trial court based its ruling partly on the decision of the Sandiganbayan in
Criminal Cases Nos. 1836 to 1837, on the finding that the PAB and Aradji
caused the publication of the filing of the criminal charges against Saber in the

Office of the City Fiscal in the Times Journal, and that the ouster of the plaintiff
from the PAB was instigated by Aradji. Thus:
It is unrebutted that plaintiffs ouster was conspired in as
demonstrated by the fact that when Saludo and other members of the
Task Force prepared the budget for Amanah Bank, the salary of the
President of the Bank was P67,000.00 per annum and the salary of the
Executive Vice-President which the plaintiff assumed was P48,000.00
but to pressure plaintiff from giving up his position, the Board was
moved by Saludo to reduce his salary to only P30,000.00 per annum.
When plaintiff left the Bank, Saludo took over the position which
plaintiff held. After Saludo, defendant Aradji assumed the position of
Executive Vice-President, the same position which plaintiff held before
39
he left the Bank. (pp. 4, 26, Deposition of Aradji).
The trial court also ruled that the sales of the tickets to Basman on credit and
the execution of the Freight Contract were with the prior approval of Martin
Saludo, the head of the One-Man Oversight Committee, as well as Nestor
Kalaw, who was the PNB Legal Counsel.
The decision was appealed to the Court of Appeals, which rendered a
judgment reversing the decision of the trial court. The CA ruled that Saber
failed to prove bad faith and malice against the PAB and Aradji in the
performance of their duties, and in exercising the powers of their office. It also
held that the latter acted out of duty to protect the interests of the PAB. The CA
further ratiocinated that
Defendants could not be blamed for acting the way they did for they
were charged with the duty to act for the bank with loyalty and
dedication, and according to their best judgment. It is a well-known rule
of law that questions of policy or of management are left solely to the
honest decisions of officers and directors of a corporation, and so long
as they act in good faith, their orders are not reviewable by the courts.
It is, thus, evident that defendants PAB and Aradji were not in the least
motivated by any malicious intent or by a sinister design to unduly
harass plaintiff Saber, but only by a well-founded anxiety to protect the
interests of the bank when they caused the filing of a criminal
complaint against the latter. The facts which presented themselves
were such as would excite the belief in a reasonable mind that the
person charged was guilty of the crimes for which he was prosecuted.
This is the essence of probable cause which eliminates the element of
malice essential in making out a case of malicious prosecution.
(Almendra v. Alvero, 50 SCRA 62 [1965]).

But whether or not defendants perception of the facts and

circumstances is actually correct is irrelevant, the only issue being
whether or not there was probable cause in the filing of the criminal
40
complaint.
The appellate court disagreed with the trial courts finding of the existence of
conspiracy between Saludo and Aradji, thus:
Nor can we see any "conspiracy" to pressure Saber into giving up his
position by the reduction of his salary. As explained by defendants,
PABs salary structure could not be made at par with that of the
Philippine National Bank, for instance, since it was just a small bank
with a paid-up capital of only P50 Million and moreover, it had only
eight branches. It was therefore deemed necessary to rationalize the
salary level of the banks officers and staff to make the operations of
41
the bank more economically sound and viable.
The Present Petition
In the meantime, Saber died intestate. His heirs, represented by Orfia Alicer
Saber, filed the instant petition for review on certiorari of the decision of the
CA, alleging that the appellate court erred in reversing the decision of the trial
court:
Petitioners herein respectfully submit that the Court a quo committed
error in concluding that under the environmental circumstances, the
award of damages to plaintiff may not be sustained whether based on
42
the principle of abuse of rights or for malicious prosecution.
The petitioners aver that Saber was able to prove his claims for damages
against the respondent, based on the principles of abuse of rights and
malicious prosecution.
The petitioners contend that the respondents acted with malice and/or in bad
faith. They allege that Saber was deprived of his right to be investigated by the
impartial investigator. They pointed out that respondent Aradji, who was the
Chairman of the Investigating Committee, was biased against Saber,
considering that the respondent made strong representations to the Board of
Directors of the respondent bank that he (Saber) be replaced by Saludo. The
petitioners stress that respondent Aradji, a non-lawyer, was designated to head
the Investigating Committee to investigate the pilgrimage fiasco. The
petitioners also allege that Saber was denied due process, as he was never
furnished with a copy of the Report of the Investigating Committee. They claim
that Saludo and respondent Aradji pressed Saber into resigning by proposing
for the reduction of his salary as PAB Executive Vice-President from P48,000
per annum to P24,000 per annum, and conspired to oust him from the said

position and as officer-in-charge of the petitioner bank because of their

ambitions: Saludo aspired to become the president of the respondent bank,
while respondent Aradji wanted to be the Managing Director.
The petitioners claim that Saber acted in good faith in entering into agreements
with Basman/AGEAC as confirmed by the Sandiganbayan in its decision; yet,
respondent PAB still approved Resolution No. 67, Series of 1975, holding
Saber personally liable for P1,012,000.00 even before the PAB tried to collect
the amount from the debtors; by its acts, the respondent bank merely made
Saber as a scapegoat.
Finally, the petitioners aver that the respondents are liable for damages for
malicious prosecution because (a) Saber alone was charged for violation of
Rep. Act No. 3019, although there were others who were involved in the
pilgrimage fiasco; and (b) despite the dismissal of the criminal complaint by the
Special Counsel, the respondents, nevertheless, pursued their appeal in the
Tanodbayan who found probable cause against Saber which finding was
barren of factual basis as confirmed by the decision of the Sandiganbayan
acquitting him of the charges.
The Ruling of the Court
The petition has no merit.
Abuse of right under Article 19 of the New Civil Code on which Saber anchored
his claim for damages and attorneys fees, provides:
Art. 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.
The elements of abuse of rights are the following: (a) the existence of a legal
right or duty which is exercised in bad faith; and (b) for the sole intent of
prejudicing or injuring another. Malice or bad faith is at the core of said
43
provision. Good faith is presumed and he who alleges bad faith has the duty
44
to prove the same. Good faith refers to the state of the mind which is
manifested by the acts of the individual concerned. It consists of the intention
to abstain from taking an unconscionable and unscrupulous advantage of
45
another. A public officer is presumed to have acted in good faith in the
performance of his duties. Unless there is a clear showing of malice, bad faith
or gross negligence, such public officer is not liable for moral and exemplary
46
damages for acts done in the performance of his official duties. Mistakes
committed by a public officer are not actionable absent any clear showing that
47
they were motivated by malice or gross negligence amounting to bad faith.
Bad faith, on the other hand, does not simply connote bad judgment to simple
negligence, dishonest purpose or some moral obloquy and conscious doing of

a wrong, a breach of known duty due to some motives or interest or ill-will that
48
partakes of the nature of fraud. Malice connotes ill-will or spite and speaks
not in response to duty. It implies an intention to do ulterior and unjustifiable
49
harm. Malice is bad faith or bad motive.
We agree with the petitioners that a person other than respondent Aradji
should have been designated as Chairperson of the Investigating Committee to
investigate the pilgrimage fiasco. This is so because in his Memorandum to the
Board of Directors of the PAB on February 21, 1975, respondent Aradji had
declared that the 1974 Mecca pilgrimage under the supervision of Saber was
mishandled and there were indications then that there was an apparent lack of
exercise of effective leadership which was so vital and essential to make the
bank truly responsive to the needs of the Filipino Muslims. Respondent Aradji
then proposed that Saludo exercise the powers of the president of the
respondent bank in place of Saber. In fine, respondent Aradji attributed the
problems attendant to the pilgrimage fiasco to Saber. But then Saber did not
oppose the designation by the Board of Directors for respondent Aradji to be
the Chairman of the Investigating Committee, or even asked for the latters
inhibition. Saber must have believed that he could still prove that he acted in
good faith, and was not guilty of any wrongdoing regardless of any
misconception of respondent Aradji. Besides, respondent Aradji was only the
chairman of the committee, and there were four (4) other members who could
rule in Sabers favor. As it was, Saber even appeared before the committee
and adduced testimonial and documentary evidence in his behalf. Thus, Saber
testified:
Q Now, what was your rule in the investigation when you were invited
to appear?
A As I have stated, they wanted me to shed light or give information
about the behavior or what had happened in that pilgrimage.
Q Did you actually appear and testified?
A Yes, I testified. I even gave the committee some documentary
reports, a copy of the report which had been submitted to the chairman
of the bank, Dr. Majul.
Q You said that Mr. Aradji headed the investigation committee created
by the bank. Is that Mr. Aradji the same defendant in this case?
A Yes, sir.

50

It was only after the Report and Recommendation of the Investigating

Committee was approved by the Board of Directors of the respondent PAB,
and the subsequent publication of the said report in the Times Journal that

Saber complained, for the first time, of the impropriety of the designation of
respondent Aradji as Chairman of the committee.
In any event, it cannot be concluded that the Board of Directors of the PAB
acted in bad faith or with malice in designating the respondent Aradji as
chairman of the committee, and that the latter acted in bad faith or with malice
in accepting the position and in not inhibiting himself from the said
investigation.
Respondent Aradji was the Acting Chairman of the Personnel Servicing
Committee. There were four (4) other members of the Investigating Committee,
one of whom was a lawyer, Atty. Arasad Alpad, Jr.; the other members were
Executive Vice-President Berua Ibrahim and Assistant Vice-President
51
Alexander Lacman, all of whom could rule for Saber based on the evidence
on record. Moreover, the report and recommendations of the committee were
still subject to the review of the Board of Directors of the respondent bank,
which included then Minister Cesar Virata. Respondent Aradji, for his part,
could also still rule for Saber, based on the evidence on record.
It is true that in his Memorandum dated February 21, 1975 respondent Aradji
proposed to the Board of Directors of the respondent PAB that Saludo, a
Senior Vice-President of the PNB and PAB management consultant, to
exercise the powers and perform the duties of the president of the respondent
bank, in effect terminating the designation of Saber as Officer-in-Charge.
However, he did so not to spite Saber, but for good and justifiable reasons,
thus:
Mr. Saludo has behind him more than 35 years of solid banking
experience and expertise in the Bank. He is acceptable to both
Christians and Muslims. I strongly believe that he is imminently
qualified to exercise the duties and powers of the President of the
Bank.
For the record, I wish to emphasize that Mr. Saludo was never sought
much less intimated to me his desire to exercise such duties and
powers. On the contrary, his being connected with our Bank is an
additional burden to him but which he has graciously accepted as [a]
challenge to place the Bank on a competitive level with the other
commercial banks in the country.
In submitting this proposal, I am only motivated by my desire to
improve the stature of the Bank, which gesture could only be
accomplished if we grant the men that executive freedom to act, and to
52
exercise strong, positive and assertive leadership in our organization.

Saber failed to adduce convincing evidence that Saludo and respondent Aradji
conspired to oust him from his position as Assistant Vice-President of the
respondent bank.
Neither may bad faith nor malice be imputed on the respondents in holding
Saber personally liable for the receivables of P1,033,700. The evidence of
th
Saber, no less, shows that he was present during the 16 Meeting of the Board
of Directors of the PAB. So were Ministers Cesar Virata and Leonides Virata.
After an intensive and exhaustive discussion, the Board resolved that Saber
had no authority to enter into any agreement with Basman for the sale of the
tickets on credit payable by postdated checks, and to execute a Freight
Contract with AGEAC over the cargo hold in the M/V Sweet Homes. The Board
unanimously resolved not to ratify the agreements executed by Basman and
Saber in behalf of the PAB and with AGEAC, and for Saber to take full
responsibility for the collection of receivables. This is shown by the Minutes of
the stenographic notes taken during the Board Meeting:
MR. SALUDO : Atty. Sadac is a lawyer, there are problems but we
have to concentrate on this.
ATTY. ABBAS : Does the Board ratify such act?
DIR. C. VIRATA : No.
ATTY. ABBAS : Is it against Dr. Saber in his individual capacity?
DR. SABER : I have not been acting as an individual person. I have
always acted on that because it is part of my position as an officer of
the Bank. There is not a single act that have not think (sic) to save the
predicament of the boat in the tense moments. When the boat was
about to leave, my Troika recommended to me that this is the
recourse, even my Legal Officer advised me, even the Auditor himself
who is (sic) there in Zamboanga. If (sic) it was really very urgent that I
have to act on the spot. I have to take (sic) a decision because it is
going to affect the entire boat if the result was negative but the real
intention is (sic) to help. We thought that we will make good for the
Bank.
DIR. C. VIRATA : I think, we have to clarify, Dr. Saber, as between the
responsibility of the officers and that of the Board. While it is true that
you have certain discretionary powers but that is either affirmed or
reviewed by the Board. In this case, you have no authority on this very
important matter so you have to take on your individual capacity
because the Board refuses to share the responsibility.
DIR. DOMINGO : Which we will review or affirm.

DIR. C. VIRATA : That is the responsibility as being the head of the

institution and all of us are subject to this restriction.

MR. SALUDO : Atty. Sadac here is willing to assist the Legal Counsel
of the Amanah Bank.

CHAIRMAN : So, I think, better muster all the legal minds in the Bank,
Mr. Saludo and the staff.

DIR. CRUZ : Can we not engage the services of the government

counsel?

DIR. DOMINGO : And finish this once and for all.

CHAIRMAN : If you think you find this necessary. (MR. SALUDO)

MR. SALUDO : We could file an action against Sacar Basman. The

question is, can we recommend?

DIR. CRUZ : I dont know the lawyer involved but basing in (sic) our
experience, unless you hire a super-duper lawyer at least you can
easily win the case. We could ask for the assistance of the Office of
the Solicitor General.

DIR. CRUZ : That is ratifying an act.

MR. SALUDO : We declared that Troika is short.
DR. SABER : The Troika is here.
DIR. C. VIRATA : It is useless. The Troika will say that Dr. Saber was
the one.

DR. SABER : Mr. Chairman and gentlemen, let me comment. Will you
please look on this affair of the pilgrimage not in terms of loss but in
terms of other things, what are the various outcome[s] of the
pilgrimage.

DIR. TEODORO : The problem here is they are funds due to the Bank.
This boat was chartered even without the approval of the Board.

CHAIRMAN : With all respect to your views, Dr. Saber, there are 2
points here. The Bank is incurring losses, the other one is, there are
people owing money. These are 2 different things. The way I look at it,
the Bank is already incurring a loss of P900,000. We are only talking
on (sic) the Accounts Receivables, it can only serve to explain why we
are losing. I think every effort should be made because it involved not
only you but also other people like Ambassador Pangandaman. Even
these people, you have to have the legal counseling to help, and we
will work hand in hand with other lawyers with their advice. If this is
difficult, we have government lawyers, this is a government bank. We
can seek their advice. The problem is how do we collect money? We
are not talking (sic) that the charter of the boat is exorbitant, if it is high.
The question is how can the Bank recover? Shall the people owing the
Bank pay? Even the Charter rate, it is very big, that is something else.
I think, that is the problem. I dont know if we understand the Board
here, whether we like it or not, we have to collect.

AUD. AGUILAR : Excuse me, there is a possibility to collect because

they have issued a communication ordering the people to ride in the
boat.

DIR. CRUZ : We have reached a consensus, why dont we give Dr.

Saber 30 days to liquidate? He is accountable, then we will decide
later what course of action shall we take.

DIR. CRUZ : We will get good Legal Advisers here. It must be the
Solicitor General.

DIR. TEODORO : Until the money is returned here as the Board has
found it necessary and it is reflected in the report, and efforts should
be made on the Accounts Receivables. He is responsible to go after
the people involved. This is the only official action of the Board.

CHAIRMAN : You run after them individually.

DIR. DOMINGO : Who are the members of the Troika?
DR. SABER : They are: Atty. Lanang Ali, Administrator, Dialel
Basman, the Treasurer, Tindug Macarambon, Project Accountant and
Ibrahim Mamao. Anything they recommended that these are their
needs I issued them because they are the ones implementing. They
implemented even in the Branches and I thought it is for the good of
the Bank.

CHAIRMAN : This was what I was suggesting.

MR. SALUDO : Sir, do you think the case will drag on if we can not
liquidate within 30 days?

DIR. TEODORO : We can not close our eyes that the money of the
Bank is lacking in amount.
DIR. CRUZ : The idea here is that, such Legal action on those people
responsible, so these people have to liquidate the account within 30
days, failure on your part, then we resort on (sic) the other course[s] of
action.
CHAIRMAN : Any objections[?]
BOARD MEMBERS : None.
CHAIRMAN : APPROVED[53]
Indeed, the Sandiganbayan ruled in its decision in Criminal Cases Nos. 18351837 that Saber had the implied authority as Executive Vice-President to sell
tickets on credit via postdated checks and to allow Basman to load his cargoes
in the cargo section of the M/V Sweet Homes; that Saber acted in good faith;
hence, was not criminally liable therefor; that the respondent bank resorted to
the dubious expedience of charging the receivables against the account of
Saber, instead of availing itself of legal remedies for their collection. However,
it cannot thereby be concluded that the Board of Directors of respondent PAB
acted in bad faith or with malice.
There is no evidence on record that as claimed by the petitioners, Saludo and
respondent Aradji conspired to oust Saber as Executive Vice-President of the
PAB and Officer-in-Charge. Saludo merely told Saber intimately that it was his
ambition to become President of the bank had not President Marcos appointed
Saber. Moreover, Saludo and Saber even became intimate friends:
ATTY. FABIE:
Cross-examination to elucidate not because he does not
understand. It is not that, Your Honor. A practitioner should be
fair. If he cross-examines, the purpose is to elicit the truth, not
to distort. Here, in this case, we want the truth.
ATTY. SADAC:
That is the purpose of my cross-examination.
COURT:
LET US PROCEED.

ATTY. SADAC: (to witness)

Q Again, Dr. Saber, on page 213 of the transcript of stenographic
notes, dated January 16, 1980, you testified that Mr. Saludo allegedly
manifested to you his desire to be president of the Philippine Amanah
Bank. For the information of this Honorable Court, will you tell us when
was this made or relayed to you?
A During my incumbency in the Philippine Amanah Bank. He did not
tell me that he desires to replace me, only his desire to become
president of the Bank. He told me intimately, he said: "Brod, if
President Marcos did not get you I would have been made president of
the Philippine Amanah Bank because I am also a Muslim." He told that
to me intimately. It was intimate, the same as I was intimate with you.
Q When was that within your incumbency, when was that made?
A In fact, he said this to me several times, and again I cannot count
how many times I am not keeping statistics of statements.
COURT:
Q AND THAT WAS SAID TO YOU DURING YOUR INCUMBENCY?
A Yes, Your Honor.
ATTY. SADAC:
Q Will you tell us, Dr. Saber, because we want to be specific, in what
occasion did Mr. Saludo tell you, what particular occasion?
A Well, under the roof of the Philippine Amanah Bank and some other
occasions, but I cannot recall again as I said I did not put this in my
diary.
Q You cannot again remember, Dr. Saber?
A Yes, Sir.
Q And when he made this alleged manifestation of his desire to
become president of the Philippine Amanah Bank, were there other
people around you in these alleged several occasions?
A I cannot remember if there were people around. If there were I will
bring them to court to testify because, as I said, this is between friends.

Mr. Saludo confirmed his friendship to me and we became friends

54
when we were in the Philippine Amanah Bank.
Neither is there evidence that respondent Aradji had any involvement at all in
the reduction of Sabers salary from P48,000 to P24,000 per annum. The
budget of the bank was modified upon the advice of PNB President Panfilo
Domingo and Saludo. This is gleaned from the transcript of stenographic notes
of Sabers testimony:
Q Do you know, Mr. Saber, for the information of this Honorable Court,
how much does the president of the Philippine Amanah Bank
received?
A The budget was P48,000.00 per annum, but I received that for a few
months the Board of Directors with the advise of President Domingo of
the Philippine National Bank and Vice-President Saludo reduced it to
50% and I was paid only P24,000.00 per annum. That discourage me
staying with the Bank.
Q In other words, the President of the Philippine Amanah Bank under
that new budget that you have mentioned is receiving about
P24,000.00 per annum?
55

A The last salary was P24,000.00 instead of P48,000.00.

The budget was approved by the Board of Directors of the PAB and Central
56
Bank of the Philippines Governor Gregorio Licaros.
Saber failed to adduce evidence that respondent Aradji issued any press
release covering his Report to the Board of Directors of the PAB or his formal
investigation and the criminal complaint he filed against Saber for violation of
Rep. Act No. 3019. The news report of Emil Macaspac of the Times Journal
does not attribute the source of the facts contained therein. When pressed to
adduce evidence to prove that the news report was based on the press release
issued by the respondent Aradji, Saber hedged and surmised that the source
of the news report could have been Atty. Roberto Sadac, the Legal Officer of
the PAB:
Q Do you know personally Emil Macaspac, the reporter of the Times
Journal?
ATTY. R. SADAC:
I just want to remind the witness that he is testifying under
oath.

ATTY. B. FABIE:
The witness, Your Honor, is an intelligent man. Dr. Saber is an
educator.
COURT:
GO AHEAD ANSWER THE QUESTION.
WITNESS:
A I do not know him personally nor intimately associated with him. I
cannot remember his face but he was among the newspaper men
frequenting your office and my office.
Q To be specific Dr. Saber, will you tell this Honorable Court the day or
the time or the period when these newspaper men especially Emil
Macaspac frequenting my office or your office?
A I am getting the evidence from the dateline of the news of July 28,
1975. So, I presumed that before the news report was printed, he was
frequenting your office, otherwise, where is the source of the news?
57
He cannot get it from outside.
The respondent PAB cannot be faulted, nor can it be ordered to pay damages
and attorneys fees for issuing a conditional clearance to Saber after his
resignation from respondent PAB. Saber had not yet liquidated his
accountability of P1,012,000 when his leave of absence from the university had
expired. The Investigating Committee had yet to commence and terminate its
investigation of Sabers accountability, administrative or civil, for the pilgrimage
fiasco. The respondent PAB had no discretion to issue a clearance to Saber. It
bears stressing that a public officer, in the discharge of his duties has to use
prudence, caution and attention in the management of his affairs. In fact, the
respondent PAB was duty bound to withhold such clearance to Saber pending
final determination of his monetary accountabilities. Even assuming that Saber
and/or the petitioners sustained economic difficulties on account of the
conditional clearance issued by the respondent PAB, the petitioners are not
entitled to moral and exemplary damages. The act of the respondent PAB was
not wrongful. It is a case of damnum absque injuria and not of damnum et
58
injuria.
To constitute malicious prosecution, there must be proof that the prosecutor
was prompted by a sinister or devious design to vex and humiliate a person,
and that it was initiated deliberately, knowing that the charges are false and
59
groundless. Malice with probable cause must both be clearly established to
60
justify an award of damages based on malicious prosecution. Lack of

probable cause is an element separate and distinct from that of malice. One
cannot be held liable for damages for malicious prosecution where he acted
61
with probable cause. We also held that a determination that there is no
probable cause cannot be made to rest solely on the fact that the trial court
after trial decided to acquit the accused. Neither can lack of probable cause be
made to rest on the fact that the finding of probable cause of the Special
Counsel was reversed by the Secretary of Justice or the Ombudsman as the
62
case may be. The mere act of submitting the case to the authorities for
63
prosecution does not make one liable for malicious prosecution. Moreover,
the adverse result of an action does not per se make the action wrongful and
subject the action to damages, for the law could not have meant to impose a
penalty on the right to litigate. If damages result from a persons exercise of a
64
right, it is damnum absque injuria.
Probable cause is that which engenders a well-founded belief that a crime has
been committed and that the respondent is probably guilty thereof and should
be held for trial. A finding for probable cause needs only to rest on evidence
showing that in all probability, a crime has been committed by the respondent.
Probable cause need not be based on clear and convincing evidence beyond
reasonable doubt. While probable cause demands more than mere suspicion,
65
it does not require that the evidence would justify conviction.
Saber failed to prove that the respondents filed the criminal complaints against
him with malice and despite lack of probable cause therefor.
The respondent PAB, through respondent Aradji, filed a criminal complaint
against Saber for violations of Section 3(e) of Rep. Act No. 3019, which has
the following enumerated elements:
(1) The accused is a public officer or a private person charged in
conspiracy with the former;
(2) The said public officer commits the prohibited acts during the
performance of his or her official duties or in relation to his or her
public functions;

In this case, the Tanodbayan found probable cause for three (3) counts of
67
violations of Section 3(e) of Republic Act No. 3019. Indeed, the evidence on
record shows the following:
First. Saber allowed Basman to buy tickets worth P756,000 payable on credit
via postdated checks over the objection of the Troika-Secretariat. The
postdated checks were blank as to the amounts. As found by the
Sandiganbayan:
Pursuant to the MEMORANDUM (Exh."G"), accused Dialel Basman as
Finance Officer of the Secretariat issued to Sacar Basman the seventy
(70) tickets therein specified worth P392,000 (t.s.n., p. 23, August 11,
1981), for which Sacar Basman issued Philippine Amanah Bank Check
No. 00377 payable to the BANK, postdated February 4, 1975, drawn
against Sacar Basmans account No. 10000008 but blank as to the
amount (Exh. "I"). Under the ADDENDUM (Exh. "G-1"), Dialel Basman
issued one hundred twenty (120) first class tickets to Sacar Basman
for which Sacar Basman issued PAB Check No. 00378 payable to the
BANK, similarly postdated February 4, 1975, drawn against the same
68
account, and also blank as to the amount. (Exh. "I-1".).
Saber failed to ascertain whether Basman issued the said checks against
sufficient funds in his account with the respondent bank. When the checks
were deposited by respondent PAB in its account, the said checks were
dishonored.
Second. Saber allowed the AGEAC to pay freight charges of P178,000 via
Check Nos. 00377 and 00378 postdated February 4, 1975, although the
balance of the account of Basman in the respondent bank was only P1,834.55.
AGEAC/Basman failed to pay the amount to the respondent PAB after the
pilgrimage.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED DUE COURSE.
No costs.
SO ORDERED.

(3) That he or she causes undue injury to any party, whether the
government or a private party;
(4) Such undue injury is caused by giving unwarranted benefits,
advantage or preference to such parties; and
(5) That the public officer has acted with manifest partiality, evident
66
bad faith or gross inexcusable neglect.

Austria-Martinez, (Acting Chairman), Tinga, and Chico-Nazario, JJ., concur.

Puno, (Chairman), J., on official leave.

to be constructed thereon (subject properties). Upon completion, the

commercial building was named the State Theatre Building.
On October 28, 1981, Rudy Robles executed a contract of lease in favor of
petitioner Cebu Bionic Builders Supply, Inc. (Cebu Bionic), a domestic
corporation engaged in the construction business, as well as the sale of
hardware materials. The contract pertinently provides:
CONTRACT OF LEASE
G.R. No. 154366

November 17, 2010

CEBU BIONIC BUILDERS SUPPLY, INC. and LYDIA SIA, Petitioners,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, JOSE TO CHIP, PATRICIO
YAP and ROGER BALILA, Respondents.
DECISION
LEONARDO DE CASTRO, J.:
1

This Petition for Review on Certiorari under Rule 45 of the Rules of Court
2
3
assails the Resolution dated February 5, 2002 and the Amended Decision
dated July 5, 2002 of the Court of Appeals in CA-G.R. CV No. 57216. In the
Resolution dated February 5, 2002, the Court of Appeals admitted the Motion
4
for Reconsideration of herein respondents Development Bank of the
Philippines (DBP), Jose To Chip, Patricio Yap and Roger Balila,
notwithstanding the fact that the same was filed more than six months beyond
the reglementary period. Said motion prayed for the reversal of the Court of
5
6
Appeals Decision dated February 14, 2001, which affirmed the Decision
dated April 25, 1997 of the Regional Trial Court (RTC) of Cebu, Branch 8, in
Civil Case No. CEB-10104 that ruled in favor of petitioners. In the Amended
Decision of July 5, 2002, the Court of Appeals reversed its previous Decision
dated February 14, 2001 and dismissed the petitioners complaint for lack of
merit.
The facts leading to the instant petition are as follows:
On June 2, 1981, the spouses Rudy R. Robles, Jr. and Elizabeth R. Robles
7
entered into a mortgage contract with DBP in order to secure a loan from the
said bank in the amount of P500,000.00. The properties mortgaged were a
parcel of land situated in Tabunoc, Talisay, Cebu, which was then covered by
Transfer Certificate of Title (TCT) No. T- 47783 of the Register of Deeds of
Cebu, together with all the existing improvements, and the commercial building

KNOW ALL MEN BY THESE PRESENTS:

This Lease Contract made and entered into, by and between:
RUDY ROBLES, JR., Filipino, of legal age, married and resident of 173 Maria
Cristina Ext., Cebu City, hereinafter referred to as the LESSOR,
- and CEBU BIONIC BUILDER SUPPLY, represented by LYDIA SIA, Filipino, of
legal age, married and with address at 240 Magallanes St., Cebu City
hereinafter known as the LESSEE;
WITNESSETH:
The LESSOR is the owner of a commercial building along Tabunok, Talisay,
Cebu, known as the State Theatre Building.
The LESSOR agrees to lease unto the LESSEE and the LESSEE accepts the
lease from the LESSOR, a portion of the ground floor thereof, consisting of one
(1) unit/store space under the following terms and conditions:
1. The LESSEE shall pay a monthly rental of One Thousand
(P1,000.00) Pesos, Philippine Currency. The rental is payable
in advance within the first five (5) days of the month, without
need of demand;
2. That the term of this agreement shall start on November 1,
1981 and shall terminate on the last day of every month
thereafter; provided however that this contract shall be
automatically renewed on a month to month basis if no notice,
in writing, is sent to the other party to terminate this agreement
after fifteen (15) days from receipt of said notice;
xxxx

9. Should the LESSOR decide to sell the property during the

term of this lease contract or immediately after the expiration
of the lease, the LESSEE shall have the first option to buy and
9
shall match offers from outside parties. (Emphases ours.)

period (equivalent to 9 months rental) shall be secured by

either surety bond, cash bond or assigned time deposit;
3. That in case there is a better offer or if the property will be
subject of a purchase offer, within the term, the lessor is given
an option of first refusal, otherwise he has to vacate the
premises within thirty (30) days from date of notice.

The above contract was not registered by the parties thereto with the Registry
of Deeds of Cebu.
Subsequently, the spouses Robles failed to settle their loan obligation with
DBP. The latter was, thus, prompted to effect extrajudicial foreclosure on the
10
subject properties. On February 6, 1987, DBP was the lone bidder in the
foreclosure sale and thereby acquired ownership of the mortgaged subject
11
12
properties. On October 13, 1988, a final Deed of Sale was issued in favor of
DBP.
Meanwhile, on June 18, 1987, DBP sent a letter to Bonifacio Sia, the husband
of petitioner Lydia Sia who was then President of Cebu Bionic, notifying the
latter of DBPs acquisition of the State Theatre Building. Said letter reads:

We consider, temporarily, the current monthly rental based on the six-month

receipts, which we require you to submit, until such time when we will fix the
amount accordingly.
If the contract of lease is not executed within thirty (30) days from date hereof,
it is construed that you are not interested in leasing the premises and will
vacate within the said period.
Please be guided accordingly.
Truly yours,

June 18, 1987

Mr. Bonifacio Sia
Bionic Builders Inc.
State Theatre Bldg.
Tabunok, Talisay, Cebu

(SGD)LUCILO S. REVILLAS
13
Branch Head (Emphases ours.)
On July 7, 1987, the counsel of Bonifacio Sia replied to the above letter, to wit:
July 7, 1987

Sir:
This refers to the commercial space you are occupying in the acquired property
of the Bank, formerly owned by Rudy Robles, Jr.
Please be informed that said property has been acquired through foreclosure
on February 6, 1987. Considering thereat, we require you to remit the rental
due for June 1987.
If you wish to continue on leasing the property, we request you to come to the
Bank for the execution of a Contract of Lease, the salient conditions of which
are as follows:
1. The lease will be on month to month basis, for a maximum
period of one (1) year;
2. Deposit equivalent to two (2) months rental and advance of
one (1) month rental, and the remaining amount for one year

Mr. Lucilo S. Revillas

Branch Head
Development Bank of the Philippines
Dear Mr. Revillas,
This has reference to your letter of 18 June 1987 which you sent to my client,
Mr. Bonifacio Sia of Cebu Bionic Builders Supply the lessee of a commercial
space of the State Theatre Bldg., located at Tabunok, Talisay, Cebu.
My client is amenable to the terms contained in your letter except the following:
1. In lieu of item no. 2 thereof, my client will deposit with your
bank the amount of P10,000.00, as assigned time deposit;
2. The 30 days notice you mentioned in your letter, (3), is too
short. My client is requesting for at least 60 days notice.

I sincerely hope that you will give due course to this request.

65199 (DBP), including

the commercial building
thereon.

Thank you.

xxxx

Truly yours,
(SGD) ANASTACIO T. MUNTUERTO, JR.

14

15

Thereafter, on November 14, 1989, a Certificate of Time Deposit for

P11,395.64 was issued in the name of Bonifacio Sia and the same was
allegedly remitted to DBP as advance rental deposit.
For reasons unclear, however, no written contract of lease was executed
between DBP and Cebu Bionic.
In the meantime, subsequent to the acquisition of the subject properties, DBP
offered the same for sale along with its other assets. Pursuant thereto, DBP
published a series of invitations to bid on such properties, which were
16
17
18
scheduled on January 19, 1989, February 23, 1989, April 13, 1989, and
19
November 15, 1990. As no interested bidder came forward, DBP publicized
an Invitation on Negotiated Sale/Offer, the relevant terms and conditions of
which stated:
INVITATION ON NEGOTIATED SALE/OFFER
The DEVELOPMENT BANK OF THE PHILIPPINES, Cebu Branch, will receive
SEALED NEGOTIATED OFFERS/PURCHASE PROPOSALS tendered at its
Branch Office, DBP Building, Osmea Boulevard, Cebu City for the sale of its
acquired assets mentioned hereinunder within the "15-Day-AcceptancePeriod" starting from NOVEMBER 19, 1990 up to 12:00 oclock noon of
DECEMBER 3, 1990. Sealed offers submitted shall be opened by the
Committee on Negotiated Offers at exactly 2:00 oclock in the afternoon of the
last day of the acceptance period in order to determine the highest and/or most
advantageous offer.
Item
No.

Description/Location

Starting Price

A pre-numbered Acknowledgment Receipt duly signed by at least two (2)

of the Committee members shall be issued to the offeror acknowledging
receipt of such offer.
Negotiated offers may be made in CASH or TERMS, the former requiring
a deposit of 10% and the latter 20% of the starting price, either in the
form of cash or cashiers/managers check to be enclosed in the sealed
offer.
xxxx
Interested negotiated offerors are requested to see Atty. Apolinar K. Panal, Jr.,
Acquired Asset in Charge (Tel. No. 9-63-25), in order to secure copies of the
Letter-Offer form and Negotiated Sale Rules and Procedures.
NOTE: If no offer is received during the above stated acceptance period,
the properties described above shall be sold to the first offeror who
submits an acceptable proposal on a "First-Come-First-Served" basis.
City of Cebu, Philippines, November 16, 1990.
(SGD.) TIMOTEO P. OLARTE
20
Branch Head (Emphases ours.)
In the morning of December 3, 1990, the last day for the acceptance of
negotiated offers, petitioners submitted through their representative, Judy
Garces, a letter-offer form, offering to purchase the subject properties for
P1,840,000.00. Attached to the letter-offer was a copy of the Negotiated Sale
Rules and Procedures issued by DBP and a managers check for the amount
of P184,000.00, representing 10% of the offered purchase price. This offer of
petitioners was not accepted by DBP, however, as the corresponding deposit
therefor was allegedly insufficient.

xxxx
II

Commercial land, Lot P1,838,100.00

No. 3681-C-3, having
an area of 396 sq. m.,
situated in Tabunok,
Talisay,
Cebu
and
covered by TCT No. T-

After the lapse of the above-mentioned 15-day acceptance period, petitioners

did not submit any other offer/proposal to purchase the subject
properties.1avvphi1
On December 17, 1990, respondents To Chip, Yap and Balila presented their
21
letter-offer
to purchase the subject properties on a cash basis for

P1,838,100.00. Said offer was accompanied by a downpayment of 10% of the

offered purchase price, amounting to P183,810.00. On even date, DBP
acknowledged the receipt of and accepted their offer. On December 28, 1990,
respondents To Chip, Yap and Balila paid the balance of the purchase price
22
and DBP issued a Deed of Sale over the subject properties in their favor.
On January 11, 1991, the counsel of respondents To Chip, Yap and Balila sent
23
a letter addressed to the proprietor of Cebu Bionic, informing the latter of the
transfer of ownership of the subject properties. Cebu Bionic was ordered to
vacate the premises within thirty (30) days from receipt of the letter and
directed to pay the rentals from January 1, 1991 until the end of the said 30day period.
24

The counsel of Cebu Bionic replied that his client received the above letter on
January 11, 1991. He stated that he has instructed Cebu Bionic to verify first
the ownership of the subject properties since it had the preferential right to
purchase the same. He likewise requested that he be furnished a copy of the
deed of sale executed by DBP in favor of respondents To Chip, Yap and Balila.
25

On February 15, 1991, respondent To Chip wrote a letter to the counsel of

Cebu Bionic, insisting that he and his co-respondents Yap and Balila urgently
needed the subject properties to pursue their business plans. He also
reiterated their demand for Cebu Bionic to vacate the premises.
Shortly thereafter, on February 27, 1991, the counsel of respondents To Chip,
26
Yap and Balila sent its final demand letter to Cebu Bionic, warning the latter
to vacate the subject properties within seven (7) days from receipt of the letter,
27
otherwise, a case for ejectment with damages will be filed against it.
28

12:00 noon of December 3, 1990. Petitioners claimed that, at about 10:00 a.m.
on December 3, 1990, they duly submitted to Atty. Apolinar Panal, Jr., Chief of
the Acquired Assets of DBP, the following documents, namely:
6.1 Letter-offer form, offering to purchase the property advertised,
for the price of P1,840,000, which was higher than the starting price
of P1,838,100.00 on cash basis. x x x;
6.2 Negotiated Sale Rules and Procedures, duly signed by plaintiff, x x
x;
6.3 Managers check for the amount of P184,000 representing 10% of
the deposit dated December 3, 1990 and issued by Allied Banking
31
Corp. in favor of the Development Bank of the Philippines. x x x.
(Emphasis ours.)
Petitioners asserted that the above documents were initially accepted but later
returned. DBP allegedly advised petitioners that "there was no urgent need for
the same x x x, considering that the property will necessarily be sold to [Cebu
Bionic] for the reasons that there was no other interested party and that [Cebu
Bionic] was a preferred party being the lessee and present occupant of the
32
property subject of the lease[.]" Petitioners then related that, without their
knowledge, DBP sold the subject properties to respondents To Chip, Yap and
Balila. The sale was claimed to be simulated and fictitious, as DBP still
received rentals from petitioners until March 1991. By acquiring the subject
properties, petitioners contended that DBP was deemed to have assumed the
contract of lease executed between them and Rudy Robles. As such, DBP was
bound by the provision of the lease contract, which stated that:

Despite the foregoing notice, Cebu Bionic still paid to DBP, on March 22,
1991, the amount of P5,000.00 as monthly rentals on the unit of the State
Theatre Building it was occupying for period of November 1990 to March 1991.

9. Should the Lessor decide to sell the property during the term of this lease
contract or immediately after the expiration of the lease, the Lessee shall have
33
the first option to buy and shall match offers from outside parties.

On April 10, 1991, petitioners filed against respondents DBP, To Chip, Yap and
29
Balila a complaint for specific performance, cancellation of deed of sale with
damages, injunction with a prayer for the issuance of a writ of preliminary
30
injunction. The complaint was docketed as Civil Case No. CEB-10104 in the
RTC.

Petitioners sought the rescission of the contract of sale between DBP and
respondents To Chip, Yap and Balila. Petitioners also prayed for the issuance
of a writ of preliminary injunction, restraining respondents To Chip, Yap and
Balila from registering the Deed of Sale in the latters favor and from
undertaking the ejectment of petitioners from the subject properties. Likewise,
petitioners entreated that DBP be ordered to execute a deed of sale covering
the subject properties in their name and to pay damages and attorneys fees.

Petitioners alleged, inter alia, that Cebu Bionic was the lessee and occupant of
a commercial space in the State Theatre Building from October 1981 up to the
time of the filing of the complaint. During the latter part of 1990, DBP
advertised for sale the State Theatre Building and the commercial lot on which
the same was situated. In the prior invitation to bid, the bidding was scheduled
on November 15, 1990; while in the next, under the 15-day acceptance period,
the submission of proposals was to be made from November 19, 1990 up to

34

In its answer, DBP denied the existence of a contract of lease between itself
and petitioners. DBP countered that the letter-offer of petitioners was actually
not accepted as their offer to purchase was on a term basis, which therefore
required a 20% deposit. The 10% deposit accompanying the petitioners letteroffer was declared insufficient. DBP stated that the letter-offer form was not

completely filled out as the "Term" and "Mode of Payment" fields were left
blank. DBP then informed petitioner Lydia Sia of the inadequacy of her offer.
After ascertaining that there was no other offeror as of that time, Lydia Sia
allegedly summoned back her representative who did not leave a copy of the
letter-offer and the attached documents. DBP maintained that petitioners
documents did not show that the same were received and approved by any
approving authority of the bank. The letter-offer attached to the complaint,
which indicated that the mode of payment was on a cash basis, was allegedly
not the document shown to DBP. In addition, DBP argued that there was no
assumption of the lease contract between Rudy Robles and petitioners since it
acquired the subject properties through the involuntary mode of extrajudicial
foreclosure and its request to petitioners to sign a new lease contract was
simply ignored. DBP, therefore, insisted that petitioners occupancy of the unit
in the State Theatre Building was merely upon its acquiescence. The
petitioners payment of rentals on March 22, 1991 was supposedly made in
bad faith as they were made to a mere teller who had no knowledge of the sale
of the subject properties to respondents To Chip, Yap and Balila. DBP, thus,
prayed for the dismissal of the complaint and, by way of counterclaim, asked
that petitioners be ordered to pay damages and attorneys fees.
Respondents To Chip, Yap and Balila no longer filed a separate answer,
35
adopting instead the answer of DBP.
36

In an Order dated July 31, 1991, the RTC granted the prayer of petitioners for
37
the issuance of a writ of preliminary injunction.
On April 25, 1997, the RTC rendered judgment in Civil Case No. CEB-10104,
finding meritorious the complaint of the petitioners. Explained the trial court:
It is a fact on record that [petitioners] complied with the requirements of deposit
and advance rental as conditions for constitution of lease between the parties.
[Petitioners] in complying with the requirements, issued a time deposit in the
amount of P11,395.64 and remitted faithfully its monthly rentals until April,
1991, which monthly rental was no longer accepted by the DBP. Although
there was no formal written contract executed between [respondent] DBP
and the [petitioners], it is very clear that DBP opted to continue the old
and previous contract including the terms thereon by accepting the
requirements contained in paragraph 2 of its letter dated June 18, 1987. It
is also a fact on record that under the lease contract continued by the DBP on
the [petitioners], it is provided in paragraph 9 thereof that the lessee shall have
the first option to buy and shall match offers from outside parties. And yet,
[respondent] DBP never gave [petitioners] the first option to buy or to
match offers from outside parties, more specifically [respondents] To
Chip, Balila and Yap. It is also a fact on record that [respondent] DBP in its
letter dated June 18, 1987 to [petitioners] wrote in paragraph 3 thereof, "that in
case there is better offer or if a property will be subject of purchase offer, within
the term, the lessee is given the option of first refusal, otherwise, he has to

vacate the premises within thirty (30) days". Yet, [respondent] DBP never
informed [petitioners] that there was an interested party to buy the
property, meaning, [respondents To Chip, Yap and Balila], thus depriving
[petitioners] of the opportunity of first refusal promised to them in its
38
letter dated June 18, 1987. x x x. (Emphases ours.)
As regards the offer of petitioners to purchase the subject properties from DBP,
the RTC gave more credence to the petitioners version of the facts, to wit:
It is also a fact on record that when [respondent] DBP offered the property for
negotiated sale under the 15-day acceptance period[, which] ended at noon of
December 3, 1991, [Cebu Bionic] submitted its offer, complete with [the
required documents.] x x x.
xxxx
These requirements, however, were unceremoniously returned by [respondent]
bank with the assurance that since there was no other bidder of the said
property, there was no urgency for the same and that [Cebu Bionic] also, in all
events, is entitled to first option being the present lessee.
The declaration of Atty. Panal to the effect that Cebu Bionic wanted to buy the
property on installment terms, such that the deposit of P184,000.00 was
insufficient being only 10% of the offer, could not be given much credence as it
is refuted by Exh. "H" which is the negotiated offer to purchase form under the
15-day acceptance period accomplished by [petitioners] which shows clearly
the written word "Cash" after the printed words "Term" and "Mode of Payment",
Exhibit "J", the Managers check issued by Allied Banking Corporation dated
December 3, 1990 in the amount of P184,000.00 representing 10% of the offer
showing the mode of payment is for cash; Exhibit "K" which is the application
for Managers check in the amount of P184,000.00 dated December 3, 1990
showing the beneficiary as DBP. If it is true that the offer of [petitioners]
was for installment payments, then in the ordinary course of human
behavior, it would not have wasted effort in securing a Managers check
in the amount of P184,000.00 which was insufficient for 20% deposit as
required for installment payments. More credible is the explanation
[given by] witness Judy Garces when she said that DBP through Atty.
Panal returned the documents submitted by her, saying that there was no
urgency for the same as there was no other bidder of [the said] property
and that Cebu Bionic was entitled to a first option to buy being the
present lessee. In the letter also of [respondent] bank dated June 18, 1987, it
is important to note that aside from requiring Cebu Bionic to comply with
certain requirements of time deposit and advance rental, as condition for
constitution of lease between the parties and which was complied by Cebu
Bionic[,] said letter further states in paragraph 3 thereof that "in case there is
[a] better offer or if the property will be subject of a purchase offer, within the
term, the lessee is given the option of first refusal, otherwise, he has to vacate

the premises within thirty days". In answer to the Courts question, however,
Atty. Panal admitted that he did not tell [petitioners] that there was another
party who was willing to purchase the property, in violation of [petitioners] right
39
of first refusal. (Emphasis ours.)

still subsisting and binding up to the present, not only on [respondent] bank but
also on [respondents To Chip, Yap and Balila]. x x x.

Likewise, the RTC found that respondents To Chip, Yap and Balila were aware
of the lease contract involving the subject properties before they purchased the
same from DBP. Thus:

WHEREFORE, THE FOREGOING PREMISES CONSIDERED, judgment is

hereby rendered:

xxxx

(1) Rescinding the Deed of Sale dated December 28, 1990 between
[respondent] Development Bank of the Philippines and [respondents]
Roger Balila, Jose To Chip and Patricio Yap;

[Respondent] Jose To Chip lamely pretends ignorance that [petitioners] are

lessees of the property, subject matter of this case. He states that he and his
partners, the other [respondents], were given assurances by Atty. Panal of the
DBP that [Lydia Sia] is not a lessee, although he knew that [petitioners] were
presently occupying the property and that it was possessed by [petitioners]
even before it was owned by the DBP. x x x.

(2) Ordering the [respondent] Development Bank of the Philippines to

execute a Deed of Sale over the property, subject matter of this case
upon payment by [petitioners] of the whole consideration involved and
to complete all acts or documents necessary to have the title over said
property transferred to the name of [petitioners];

xxxx

41

[Respondent] Roger Balila, in his testimony, likewise pretended ignorance that

he knew that [Lydia Sia] was a lessee of the property. x x x.

(3) Costs against [respondents].

42

xxxx
Upon further questioning by the Court, he admitted that [Lydia Sia] was not
possessing the building freely; that she was a lessee of Rudy Robles, the
former owner, but cleverly insisted in disowning knowledge that [Lydia Sia] was
a lessee, denying knowledge that [Lydia Sia] was paying rentals to
[respondent] bank. His pretended ignorance x x x was a way of evading [Cebu
Bionics] right of first priority to buy the property under the contract of lease. x x
x The Court is convinced that [respondents To Chip, Yap and Balila] knew that
[Cebu Bionic] was the present lessee of the property before they bought the
same from [respondent] bank. Common observation, knowledge and
experience dictates that as a prudent businessman, it was but natural that he
ask Lydia Sia what her status was in occupying the property when he went to
talk to her, that he ask her if she was a lessee. But he said, all he asked her
40
was whether she was interested to buy the property. x x x.

DBP forthwith filed a Notice of Appeal. Respondents To Chip, Yap and Balila
43
filed a Motion for Reconsideration of the above decision, but the RTC denied
44
the same in an Order dated July 4, 1997. Said respondents then filed their
45
Notice of Appeal.
On February 14, 2001, the Court of Appeals promulgated its Decision,
pronouncing that:

46

We find nothing erroneous with the judgment rendered by the trial court.
Perforce, We sustain it and dismiss the [respondents] submission.
The RTC determined, upon evidence on record after a careful evaluation of the
witnesses and their testimonies during the trial that indeed [petitioners] right of
first option was violated and thus, rescission of the sale made by DBP to
[respondents To Chip, Yap and Balila] are in order.

The trial court, therefore, concluded that:

xxxx

From the foregoing facts on record, it is thus clear that [petitioner] Cebu Bionic
is the present lessee of the property, the lease contract having been continued
by [respondent] DBP when it received rental payments up to March of 1991 as
well as the advance rental for one year represented by the assigned time
deposit which is still in [respondent] banks possession. The provision,
therefore, in the lease contract, on the right of first option to buy and the right of
first refusal contained in [respondent] banks letter dated June 18, 1987, are

Apparently, DBP accepted [the documents submitted by petitioners] and

thereafter, through Atty. Panal (of DBP), returned all of it to the [petitioners]
"with the assurance that since there was no other bidder of the said property,
there was no urgency for the same and that [Cebu Bionic] also, in all events, is
entitled to first option being the present lessee.

[DBP] maintains that the return of the documents [submitted by petitioners]

was in order since the [petitioners] offered to buy the property in question on
installment basis requiring a higher 20% deposit. This, however, was correctly
rejected by the trial court[.] x x x
The binding effect of the lease agreement upon the [respondents To Chip, Yap
and Balila] must be sustained since from existing jurisprudence cited by the
lower court, it was determined during trial that:
"... [respondents To Chip, Yap and Balila] knew that [Cebu Bionic] was
the present lessee of the property before they bought the same from
[respondent] bank. Common observation, knowledge and experience
dictates that as a prudent businessman, it was but natural that he ask
Lydia Sia what her status was in occupying the property when he went to
talk to her, that he ask her if she was a lessee. But he said, all he asked
her was whether she was interested to buy the property. x x x.
Moreover, We find that the submissions presented by the [respondents] in their
respective briefs argue against questions of facts as found and determined by
the lower court. The respondents contentions consist of crude attempts to
question the assessment and evaluation of testimonies and other evidence
gathered by the trial court.
It must be remembered that findings of fact as determined by the trial court are
entitled to great weight and respect from appellate courts and should not be
disturbed on appeal unless for [strong] and cogent reasons. These findings
generally, so long as supported by evidence on record, are not to be disturbed
unless there are some facts or evidence which the trial court has
misappreciated or overlooked, and which if considered would have altered the
results of the entire case. Sad to say for the [respondents], We see no reason
to depart from this well-settled legal principle.
WHEREFORE, in view of the foregoing, the judgment of the Regional Trial
Court of Cebu City, Branch 8, in Civil Case No. 10104 is hereby AFFIRMED
47
in toto.
On October 1, 2001, petitioners filed a Motion for Issuance of Entry of
48
Judgment. Petitioners stressed that, based on the records of the case,
respondents were served a copy of the Court of Appeals Decision dated
February 14, 2001 sometime on March 7, 2001. However, petitioners
discovered that respondents have not filed any motion for reconsideration of
the said decision within the reglementary period therefor, nor was there any
petition for certiorari or appeal filed before the Supreme Court.
In response to the above motion, respondents To Chip, Yap and Balila filed on
49
October 8, 2001 a Motion to Admit Motion for Reconsideration. Atty. Francis

M. Zosa, the counsel for respondents To Chip, Yap and Balila, explained that
he sent copies of the motion for reconsideration to petitioners and DBP via
personal delivery. On the other hand, the copies of the motion to be filed with
the Court of Appeals were purportedly sent to Mr. Domingo Tan, a friend of
Atty. Zosa in Quezon City, who agreed to file the same personally with the
appellate court in Manila. When Atty. Zosa inquired if the motion for
reconsideration was accordingly filed, Mr. Tan allegedly answered in the
affirmative. To his surprise, Atty. Zosa received a copy of petitioners Motion for
Issuance of Entry of Judgment. Atty. Zosa, thus, attributed the failure of his
clients to file a motion for reconsideration on the mistake, excusable
negligence and/or fraud committed by Mr. Tan.
In the assailed Resolution dated February 5, 2002, the Court of Appeals
granted the motion of respondents To Chip, Yap and Balila and admitted the
motion for reconsideration attached therewith "in the higher interest of
50
substantial justice."
On July 5, 2002, the Court of Appeals reversed its original Decision dated
February 14, 2001, reasoning thus:
After a judicious review and reevaluation of the evidence and facts on record,
we are convinced that DBP had terminated the Robles lease contract. From its
letter of June 18, 1987, DBP had expressly notified [petitioners] that "(I)f they
wish to continue on leasing the property x x x" "to come to the Bank for the
execution of a Contract of Lease, the salient conditions of which are as follows:
1. The lease will be on a month to month basis for a maximum
period of one (1) year;
2. Deposit equivalent to two (2) months rental and advance of
one (1) month rental, and the remaining amount for one year
(equivalent to 9 months rental) shall be secured by either surety
bond, cash bond or assigned time deposit;
3. That in case there is a better offer or if the property will be
subject of a purchase offer, within the term, the lessor is given an
option of first refusal, otherwise he has to vacate the premises
within thirty (30) days from date of notice.
We consider, temporarily, the current monthly rental based on the six-month
receipts, which we require you to submit, until such time when we will fix the
amount accordingly."
Evidently, except for the remittance of the monthly rentals up to March 1991,
the conditions imposed by DBP have never been complied with. [Petitioners]
did not go to the Bank to sign any new written contract of lease with DBP.

[Petitioners] also did not put up a surety bond nor cash bond nor assign a time
deposit to secure the payment of rental for nine (9) months, although the
[petitioners] opened a time deposit but did not assign it to DBP.

x x x [T]he acceptance by DBP of the monthly rentals does not mean that the
terms of the Robles contract were revived. In the case of Dizon vs. Court of
Appeals, the Supreme Court declared that:

But even with the remittance and acceptance of the deposit made by
[petitioners] equivalent to two (2) months rental and advance of one (1) month
rental it does not necessarily follow that DBP opted to continue with the Robles
lease. This is because the Robles contract provides:

"The other terms of the original contract of lease which are revived in the
implied new lease under Article 1670 of the New Civil Code are only those
terms which are germane to the lessees right [of] continued enjoyment of the
property leased an implied new lease does not ipso facto carry with it any
implied revival of any option to purchase the leased premises."

"That the term of the agreement shall start on November 1, 1981 and shall
terminate on the last day of every month thereafter, provided however,
that this contract shall be automatically renewed on a month to month
basis if no notice in writing is sent to the other party to determine to
terminate this agreement after fifteen (15) days from the receipt of said
notice."
Here, a notice was sent to [petitioners] on June 18, 1987, informing them that if
they "wish to continue on leasing the property, we request you to come to the
Bank for the execution of a Contract of Lease x x x."
[Petitioners] failed to enter into the contract of lease required by DBP for it to
continue occupying the leased premises.
Because of [petitioners] failure to comply with the conditions embodied in the
18 June 1987 letter, it cannot be said that [petitioners] entered into a new
contract with DBP where they were given the first option to buy the leased
property and to match offers from outside parties.

In view of the foregoing, it is clear that [petitioners] had no right to file a case
for rescission of the deed of sale executed by DBP in favor of [respondents
To Chip, Yap and Balila] because said deed of sale did not violate their alleged
first option to buy or match offers from outside parties which is legally nonexistent and which was not impliedly renewed under Article 1670 of the Civil
Code.
WHEREFORE, premises considered, the 14 February 2001 Decision is hereby
RECONSIDERED and another one is issued REVERSING the 25 April 1997
Decision of the Regional Trial Court, Branch 8, Cebu City in Civil Case No.
51
CEB-10104 and the complaint of [petitioners] is DISMISSED for lack of merit.
Without seeking a reconsideration of the above decision, petitioners filed the
instant petition. In their Comment, respondents opposed the petition on both
procedural and substantive grounds.
In petitioners Memorandum, they summarized the issues to be resolved in the
present case as follows:

xxxx
A) PRELIMINARY ISSUES:
Be that as it may, DBP continued to accept the monthly rentals based on the
old Robles contract despite the fact that the [petitioners] failed to enter into a
written lease contract with it. Corollarily, the relations between the parties is
now governed by Article 1670 of the New Civil Code, thus:
"Art. 1670. If at the end of contract the lessee should continue enjoying the
thing leased for fifteen days with the acquiescence of the lessor, and unless a
notice to the contrary by either party has previously been given, it is
understood that there is an implied new lease, not for the period of the original
contract, but for the time established in Articles 1682 and 1687. The other
terms of the original contract shall be revived."
xxxx

I
WHETHER
OR
NOT
THE
VERIFICATION
(AND
CERTIFICATION OF NON-FORUM SHOPPING) IN THE
INSTANT PETITION WAS PROPER AND VALID DESPITE
ITS BEING SIGNED BY ONLY ONE OF THE TWO
PETITIONERS.
II
WHETHER OR NOT ONLY QUESTIONS OF LAW AND NOT
OF FACT CAN BE RAISED IN THE INSTANT PETITION
BEFORE THIS HON. SUPREME COURT.

B) MAIN AND PRINCIPAL ISSUES IN THE INSTANT PETITION:

RESPONDENT
RIGHTS

DBP

HAD

VIOLATED

PETITIONERS

I
VII
WHETHER OR NOT THE HON. COURT OF APPEALS
ERRED IN ADMITTING RESPONDENTS MOTION FOR
RECONSIDERATION DESPITE ITS BEING FILED OUT OF
TIME
II
WHETHER OR NOT THE HON. COURT OF APPEALS
ERRED IN DECLARING THAT PETITIONERS DID NOT
ENTER INTO CONTRACT WITH RESPONDENT DBP
CONTINUING THE TERMS OF THE ROBLES CONTRACT
III
WHETHER OR NOT THE HON. COURT OF APPEALS
ERRED WHEN IT DECLARED THAT THE CONTINUATION
BY RESPONDENT DBP OF THE LEASE CONTRACT DID
NOT CONTAIN THE RIGHT OF FIRST REFUSAL

IV
WHETHER OR NOT THE HON. COURT OF APPEALS
ERRED WHEN IT DECLARED THAT THE LEASE
CONTRACT IS GOVERNED BY ART. 1670 OF THE NEW
CIVIL CODE
V
WHETHER OR NOT THE HON. COURT OF APPEALS
ERRED WHEN IT FAILED TO RECOGNIZE PETITIONERS
RIGHT OF FIRST REFUSAL TO WHICH RESPONDENTS
WERE BOUND

WHETHER OR NOT THE HON. COURT OF APPEALS

ERRED IN REVERSING ITS OWN JUDGMENT AND
52
DISMISSING PETITIONERS CLAIM FOR RESCISSION
We shall first resolve the preliminary issues.
Respondents To Chip, Yap and Balila argue that the instant petition should be
dismissed outright as the verification and certification of non-forum shopping
was executed only by petitioner Lydia Sia in her personal capacity, without the
participation of Cebu Bionic.
The Court is not persuaded.
Except for the powers which are expressly conferred on it by the Corporation
Code and those that are implied by or are incidental to its existence, a
corporation has no powers. It exercises its powers through its board of
directors and/or its duly authorized officers and agents. Thus, its power to sue
and be sued in any court is lodged with the board of directors that exercises its
53
corporate powers. Physical acts, like the signing of documents, can be
performed only by natural persons duly authorized for the purpose by
54
corporate by-laws or by a specific act of the board of directors.
In this case, respondents To Chip, Yap and Balila obviously overlooked the
55
Secretarys Certificate attached to the instant petition, which was executed by
the Corporate Secretary of Cebu Bionic. Unequivocally stated therein was the
fact that the Board of Directors of Cebu Bionic held a special meeting on July
26, 2002 and they thereby approved a Resolution authorizing Lydia Sia to
elevate the present case to this Court in behalf of Cebu Bionic, to wit:
Whereas, the board appointed LYDIA I. SIA to act and in behalf of the
corporation to file the CERTIORARI with the Supreme Court in relations to the
decision of the Court of Appeals dated July 5, 2002 which reversed its own
judgment earlier promulgated on February 14, 2001 entitled CEBU BIONIC
BUILDERS SUPPLY, INC. and LYDIA SIA, (Petitioners- Appellants) versus
THE DEVELOPMENT BANK OF THE PHILIPPINES, JOSE TO CHIP,
PATRICIO YAP and ROGER BALILA (Respondents- Appelles), docketed CAG.R. NO. 57216.

VI
WHETHER OR NOT THE HON. COURT OF APPEALS
ERRED WHEN IT FAILED TO DECLARE THAT

Whereas, on mass unanimously motion of all members of directors present

hereby approved the appointment of LYDIA I. SIA to act and sign all papers in
connection of CA-G.R. NO. 57216.

Resolved and it is hereby resolve to appoint and authorized LYDIA I. SIA to

sign and file with the SUPREME COURT in connection to decision of the Court
56
of Appeals as above mention.
Respondents To Chip, Yap and Balila next argue that the instant petition raises
questions of fact, which are not allowed in a petition for review on certiorari.
They, therefore, submit that the factual findings of the Court of Appeals are
binding on this Court.
Section 1, Rule 45 of the Rules of Court categorically states that the petition
filed thereunder shall raise only questions of law, which must be distinctly set
forth. A question of law arises when there is doubt as to what the law is on a
certain state of facts, while there is a question of fact when the doubt arises as
to the truth or falsity of the alleged facts. For a question to be one of law, the
same must not involve an examination of the probative value of the evidence
presented by the litigants or any of them. The resolution of the issue must rest
solely on what the law provides on the given set of circumstances. Once it is
clear that the issue invites a review of the evidence presented, the question
57
posed is one of fact.
58

The above rule, however, admits of certain exceptions, one of which is when
the findings of the Court of Appeals are contrary to those of the trial court. As
will be discussed further, this exception is attendant in the case at bar.
We now determine the principal issues put forward by petitioners.
First off, petitioners fault the Court of Appeals for admitting the Motion for
Reconsideration of its Decision dated February 14, 2001, which was filed by
respondents To Chip, Yap and Balila more than six months after receipt of the
said decision. The motion was eventually granted and the Court of Appeals
issued its assailed Amended Decision, ruling in favor of respondents.
Indeed, the appellate courts Decision dated February 14, 2001 would have
ordinarily attained finality for failure of respondents to seasonably file their
Motion for Reconsideration thereon. However, we agree with the Court of
Appeals that the higher interest of substantial justice will be better served if
respondents procedural lapse will be excused.
Verily, we had occasion to apply this liberality in the application of procedural
59
rules in Barnes v. Padilla where we aptly declared that
The failure of the petitioner to file his motion for reconsideration within the
period fixed by law renders the decision final and executory. Such failure
carries with it the result that no court can exercise appellate jurisdiction to
review the case. Phrased elsewise, a final and executory judgment can no

longer be attacked by any of the parties or be modified, directly or indirectly,

even by the highest court of the land.
However, this Court has relaxed this rule in order to serve substantial justice
considering (a) matters of life, liberty, honor or property, (b) the existence of
special or compelling circumstances, (c) the merits of the case, (d) a cause not
entirely attributable to the fault or negligence of the party favored by the
suspension of the rules, (e) a lack of any showing that the review sought is
merely frivolous and dilatory, and (f) the other party will not be unjustly
60
prejudiced thereby.
In this case, what are involved are the property rights of the parties given that,
ultimately, the fundamental issue to be determined is who among the
petitioners and respondents To Chip, Yap and Balila has the better right to
purchase the subject properties. More importantly, the merits of the case
sufficiently called for the suspension of the rules in order to settle conclusively
the rights and obligations of the parties herein.
In essence, the questions that must be resolved are: 1) whether or not there
was a contract of lease between petitioners and DBP; 2) if in the affirmative,
whether or not this contract contained a right of first refusal in favor of
petitioners; and 3) whether or not respondents To Chip, Yap and Balila are
likewise bound by such right of first refusal.
Petitioners contend that there was a contract of lease between them and DBP,
considering that they had been allowed to occupy the premises of the subject
property from 1987 up to 1991 and DBP received their rental payments
corresponding to the said period. Petitioners claim that DBP were aware of
their lease on the subject property when the latter foreclosed the same and the
acquisition of the subject properties through foreclosure did not terminate the
lease. Petitioners subscribe to the ruling of the RTC that even if there was no
written contract of lease, DBP chose to continue the existing contract of lease
between petitioners and Rudy Robles by accepting the requirements set down
by DBP on the letter dated June 18, 1987. Petitioners likewise posit that the
contract of lease between them and Rudy Robles never expired, inasmuch as
the contract did not have a definite term and none of the parties thereto
terminated the same. In view of the continuation of the lease contract between
petitioners and Rudy Robles, petitioners submit that Article 1670 of the Civil
Code on implied lease is not applicable on the instant case.
We are not persuaded.
61

In Uy v. Land Bank of the Philippines, the Court held that "[i]n respect of the
lease on the foreclosed property, the buyer at the foreclosure sale merely
succeeds to the rights and obligations of the pledgor-mortgagor subject to the
provisions of Article 1676 of the Civil Code on its possible termination. This

article provides that [t]he purchaser of a piece of land which is under a lease
that is not recorded in the Registry of Property may terminate the lease, save
when there is a stipulation to the contrary in the contract of sale, or when the
purchaser knows of the existence of the lease. In short, the buyer at the
foreclosure sale, as a rule, may terminate an unregistered lease except when it
knows of the existence of the lease."
In the instant case, the lease contract between petitioners and Rudy Robles
62
was not registered. During trial, DBP denied having any knowledge of the
63
said lease contract. It asserted that the lease was merely presumed in view
64
of the existence of tenants in the subject property. Nevertheless, DBP
recognized and acknowledged this lease contract in its letter dated June 18,
1987, which was addressed to Bonifacio Sia, then President of Cebu Bionic.
DBP even required Sia to pay the monthly rental for the month of June 1987,
thereby exercising the right of the previous lessor, Rudy Robles, to collect the
rental payments from the lessee. In the same letter, DBP extended an offer to
Cebu Bionic to continue the lease on the subject property, outlining the
provisions of the proposed contract and specifically instructing the latter to
come to the bank for the execution of the same. DBP likewise gave Cebu
Bionic a 30-day period within which to act on the said contract execution.
Should Cebu Bionic fail to do so, it would be deemed uninterested in
continuing with the lease. In that eventuality, the letter states that Cebu Bionic
should vacate the premises within the said period.
Instead of acceding to the terms of the aforementioned letter, the counsel of
Cebu Bionic sent a counter-offer to DBP dated July 7, 1987, suggesting a
different mode of payment for the rentals and requesting for a 60-day period
within which time the parties will execute a new contract of lease.
The parties, however, failed to execute a written contract of lease. Petitioners
put the blame on DBP, asserting that no contract was signed because DBP did
not prepare it for them. DBP, on the other hand, counters that it was petitioners
who did not positively act on the conditions for the execution of the lease
contract. In view of the counter-offer of petitioners, DBP and respondents To
Chip, Yap and Balila argue that there was no meeting of minds between DBP
and petitioners, which would have given rise to a new contract of lease.
The Court rules that, indeed, no new contract of lease was ever perfected
between petitioners and DBP.
In Metropolitan Manila Development Authority v. JANCOM Environmental
65
Corporation, we emphasized that:
Under Article 1305 of the Civil Code, "[a] contract is a meeting of minds
between two persons whereby one binds himself, with respect to the other, to
give something or to render some service." A contract undergoes three distinct

stages preparation or negotiation, its perfection, and finally, its

consummation. Negotiation begins from the time the prospective contracting
parties manifest their interest in the contract and ends at the moment of
agreement of the parties. The perfection or birth of the contract takes place
when the parties agree upon the essential elements of the contract. The last
stage is the consummation of the contract wherein the parties fulfill or perform
the terms agreed upon in the contract, culminating in the extinguishment
thereof (Bugatti vs. CA, 343 SCRA 335 [2000]). Article 1315 of the Civil Code,
provides that a contract is perfected by mere consent. Consent, on the other
hand, is manifested by the meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the contract (See Article 1319, Civil
66
Code). x x x.
In the case at bar, there was no concurrence of offer and acceptance vis--vis
the terms of the proposed lease agreement. In fact, after the reply of
petitioners counsel dated July 7, 1987, there was no indication that the parties
undertook any other action to pursue the execution of the intended lease
contract. Petitioners even admitted that they merely waited for DBP to present
the contract to them, despite being instructed to come to the bank for the
67
execution of the same.
Contrary to the ruling of the RTC, the Court is also not convinced that DBP
opted to continue the existing lease contract between petitioners and Rudy
Robles.
The findings of the RTC that DBP supposedly accepted the requirements the
latter set forth in its letter dated June 18, 1987 is not well taken. To
recapitulate, the third paragraph of the letter reads:
If you wish to continue on leasing the property, we request you to come to the
Bank for the execution of a Contract of Lease, the salient conditions of which
are as follows:
1. The lease will be on month to month basis, for a maximum period of
one (1) year;
2. Deposit equivalent to two (2) months rental and advance of one (1)
month rental, and the remaining amount for one year period
(equivalent to 9 months rental) shall be secured by either surety bond,
cash bond or assigned time deposit;
3. That in case there is a better offer or if the property will be subject of
a purchase offer, within the term, the lessor is given an option of first
refusal, otherwise he has to vacate the premises within thirty (30) days
68
from date of notice.

The so-called "requirements" enumerated in the above paragraph are not

really requirements to be complied with by the petitioners for the execution of
the proposed lease contract, as apparently considered by the RTC and the
petitioners. A close reading of the letter reveals that the items enumerated
therein were in fact the salient terms and conditions of the proposed contract of
lease, which the DBP and the petitioners were to execute if the latter were so
willing. Also, the Certificate of Time Deposit in the amount of P11,395.64,
which was allegedly paid to DBP as advance rental deposit pursuant to the
said requirements, was not even clearly established as such since it was
neither secured by a security bond or a cash bond, nor was it assigned to DBP.

Article 1670 states that "[i]f at the end of the contract the lessee should
continue enjoying the thing leased for fifteen days with the acquiescence of the
lessor, and unless a notice to the contrary by either party has previously been
given, it is understood that there is an implied new lease, not for the period of
the original contract, but for the time established in Articles 1682 and 1687.
The other terms of the original contract shall be revived." In view of the order to
vacate embodied in the letter of DBP dated June 18, 1987 in the event that no
new lease contract is entered into, the petitioners continued possession of the
subject properties was without the acquiescence of DBP, thereby negating the
constitution of an implied lease.

The contention that the lease contract between petitioners and Rudy Robles
did not expire, given that it did not have a definite term and the parties thereto
failed to terminate the same, deserves scant consideration. To recall, the
second paragraph of the terms and conditions of the contract of lease between
petitioners and Rudy Robles reads:

Contrary to the ruling of the RTC, DBPs acceptance of petitioners rental

payments of P5,000.00 for the period of November 1990 to March 1991 did not
likewise give rise to an implied lease between petitioners and DBP. In
Tagbilaran Integrated Settlers Association (TISA) Incorporated v. Court of
71
Appeals, we held that "the subsequent acceptance by the lessor of rental
payments does not, absent any circumstance that may dictate a contrary
conclusion, legitimize the unlawful character of their possession." In the
present case, the petitioners rental payments to DBP were made in lump sum
on March 22, 1991. Significantly, said payments were remitted only after
petitioners were notified of the sale of the subject properties to respondents To
Chip, Yap and Balila and after the petitioners were given a final demand to
vacate the properties. These facts substantially weaken, if not controvert, the
finding of the RTC and the argument of petitioners that the latter were faithfully
remitting their rental payments to DBP until the year 1991.

2. That the term of this agreement shall start on November 1, 1981 and shall
terminate on the last day of every month thereafter; provided however that this
contract shall be automatically renewed on a month to month basis if no notice,
in writing, is sent to the other party to terminate this agreement after fifteen (15)
69
days from receipt of said notice. (Emphases ours.)
Crystal clear from the above provision is that the lease is on a month-to-month
basis. Relevantly, the well-entrenched principle is that a lease from month-tomonth is with a definite period and expires at the end of each month upon the
70
demand to vacate by the lessor. As held by the Court of Appeals in the
assailed Amended Decision, the above-mentioned lease contract was duly
terminated by DBP by virtue of its letter dated June 18, 1987. We reiterate that
the letter explicitly directed the petitioners to come to the office of the DBP if
they wished to enter into a new lease agreement with the said bank.
Otherwise, if no contract of lease was executed within 30 days from the date of
the letter, petitioners were to be considered uninterested in entering into a new
contract and were thereby ordered to vacate the property. As no new contract
was in fact executed between petitioners and DBP within the 30-day period,
the directive to vacate, thus, took effect. DBPs letter dated June 18, 1987,
therefore, constituted the written notice that was required to terminate the
lease agreement between petitioners and Rudy Robles. From then on, the
petitioners continued possession of the subject property could be deemed to
be without the consent of DBP.
Thusly, petitioners assertion that Article 1670 of the Civil Code is not
applicable to the instant case is correct. The reason, however, is not that the
existing contract was continued by DBP, but because the lease was terminated
by DBP, which termination was accompanied by a demand to petitioners to
vacate the premises of the subject property.

Thus, having determined that the petitioners and DBP neither executed a new
lease agreement, nor entered into an implied lease contract, it follows that
petitioners claim of entitlement to a right of first refusal has no leg to stand on.
Furthermore, even if we were to grant, for the sake of argument, that an
implied lease was constituted between petitioners and the DBP, the right of
first refusal that was contained in the prior lease contract with Rudy Robles
was not renewed therewith. This is in accordance with the ruling in Dizon v.
72
Magsaysay, which involved the issue of whether a provision regarding a
preferential right to purchase is revived in an implied lease under Article 1670,
to wit:
"[T]he other terms of the original contract" which are revived in the implied new
lease under Article 1670 are only those terms which are germane to the
lessees right of continued enjoyment of the property leased. This is a
reasonable construction of the provision, which is based on the presumption
that when the lessor allows the lessee to continue enjoying possession of the
property for fifteen days after the expiration of the contract he is willing that
such enjoyment shall be for the entire period corresponding to the rent which is
customarily paid in this case up to the end of the month because the rent
was paid monthly. Necessarily, if the presumed will of the parties refers to the
enjoyment of possession the presumption covers the other terms of the

contract related to such possession, such as the amount of rental, the date
when it must be paid, the care of the property, the responsibility for repairs, etc.
But no such presumption may be indulged in with respect to special
agreements which by nature are foreign to the right of occupancy or enjoyment
73
inherent in a contract of lease.
DBP cannot, therefore, be accused of violating the rights of petitioners when it
offered the subject properties for sale, and eventually sold the same to
respondents To Chip, Yap and Balila, without first notifying petitioners. Neither
were the said respondents bound by any right of first refusal in favor of
petitioners. Consequently, the sale of the subject properties to respondents
was valid. Petitioners claim for rescission was properly dismissed.
WHEREFORE, the Petition for Review on Certiorari under Rule 45 of the Rules
of Court is DENIED. The Resolution dated February 5, 2002 and the Amended
Decision dated July 5, 2002 of the Court of Appeals in CA-G.R. CV No. 57216
are hereby AFFIRMED. No costs.
SO ORDERED.
TERESITA J. LEONARDO-DE CASTRO
Associate Justice

The antecedent facts are, undisputed:

On October 29, 1958, Original Certificate of Title No. 0-381 was issued in favor
of Rafael Galvez, over four parcels of land - Lot 1 with 6,571 square meters;
Lot 2, with 16,777 square meters; Lot 3 with 1,583 square meters; and Lot 4,
with 508 square meters.
On April 11, 1960, Lots No. 1 and 4 were conveyed by Rafael Galvez in favor
of Filipina Mamaril, Cleopatra Llana, Regina Bustos, and Erlinda Balatbat in a
deed of sale which was inscribed as Entry No. 9115 OCT No.0-381 on August
10, 1960. Consequently, Transfer Certificate No. T-4304 was issued in favor of
the buyers covering Lots No. 1 and 4.
Lot No. 1 is described as:
A parcel of land (Lot 1, Plan PSU-159621, L.R. Case No. N-361;
L.R.C. Record No. N-14012, situated in the Barrio of Poro, Municipality
of San Fernando, Province of La Union, bounded on the NE, by the
Foreshore; on the SE, by Public Land and property of the Benguet
Consolidated Mining Company; on the SW, by properties of Rafael
Galvez (US Military Reservation Camp Wallace) and Policarpio Munar;
and on the NW, by an old Barrio Road. Beginning at a point marked "1"
on plan, being S. 74 deg. 11'W., 2670.36 from B.L.L.M. 1, San
Fernando, thence
S. 66 deg. 19'E., 134.95 m. to point 2; S.14 deg. 57'W., 11.79 m. to
point 3;

G.R. No. 143377

February 20, 2001

SHIPSIDE INCORPORATED, petitioner,

vs.
THE HON. COURT OF APPEALS [Special Former Twelfth Division], HON.
REGIONAL TRIAL COURT, BRANCH 26 (San Fernando City, La Union) &
The REPUBLIC OF THE PHILIPPINES, respondents.
MELO, J.:
Before the Court is a petition for certiorari filed by Shipside Incorporated under
Rule 65 of the 1997 Rules on Civil Procedure against the resolutions of the
Court of Appeals promulgated on November 4, 1999 and May 23, 2000, which
respectively, dismissed a petition for certiorari and prohibition and thereafter
denied a motion for reconsideration.

S. 12 deg. 45'W., 27.00 m. to point 4; S. 12 deg. 45'W, 6.90 m. to point

5;
N. 69 deg., 32'W., 106.00 m. to point 6; N. 52 deg., 21'W., 36.85 m. to
point 7;
N. 21 deg. 31'E., 42.01 m. to the point of beginning; containing an area
of SIX THOUSAND FIVE HUNDRED AND SEVENTY - ONE (6,571)
SQUARE METERS, more or less. All points referred to are indicated
on the plan; and marked on the ground; bearings true, date of survey,
February 4-21, 1957.
Lot No. 4 has the following technical description:
A parcel of land (Lot 4, Plan PSU-159621, L.R. Case No. N-361 L.R.C.
Record No. N-14012), situated in the Barrio of Poro, Municipality of
San Fernando, La Union. Bounded on the SE by the property of the
Benguet Consolidated Mining Company; on the S. by property of

Pelagia Carino; and on the NW by the property of Rafael Galvez (US

Military Reservation, Camp Wallace). Beginning at a point marked "1"
on plan, being S. deg. 24'W. 2591.69 m. from B.L.L.M. 1, San
Fernando, thence S. 12 deg. 45'W., 73.03 m. to point 2; N. 79 deg.
59'W., 13.92 m. to point 3; N. 23 deg. 26'E., 75.00 m. to the point of
beginning; containing an area of FIVE HUNDED AND EIGHT (508)
SQUARE METERS, more or less. All points referred to are indicated in
the plan and marked on the ground; bearings true, date of survey,
February 4-21, 1957.
On August 16, 1960, Mamaril, et al. sold Lots No. 1 and 4 to Lepanto
Consolidated Mining Company. The deed of sale covering the aforesaid
property was inscribed as Entry No. 9173 on TCT No. T-4304. Subsequently,
Transfer Certificate No. T-4314 was issued in the name of Lepanto
Consolidated Mining Company as owner of Lots No. 1 and 4.
On February 1, 1963, unknown to Lepanto Consolidated Mining Company, the
Court of First Instance of La Union, Second Judicial District, issued an Order in
Land Registration Case No. N- 361 (LRC Record No. N-14012) entitled "Rafael
Galvez, Applicant, Eliza Bustos, et al., Parties-In-Interest; Republic of the
Philippines, Movant" declaring OCT No. 0-381 of the Registry of Deeds for the
Province of La Union issued in the name of Rafael Galvez, null and void, and
ordered the cancellation thereof.
The Order pertinently provided: Accordingly, with the foregoing, and
without prejudice on the rights of incidental parties concerned herein to
institute their respective appropriate actions compatible with whatever
cause they may have, it is hereby declared and this court so holds that
both proceedings in Land Registration Case No. N-361 and Original
Certificate No. 0-381 of the Registry of Deeds for the province of La
Union issued in virtue thereof and registered in the name of Rafael
Galvez, are null and void; the Register of Deeds for the Province of La
Union is hereby ordered to cancel the said original certificate and/or
such other certificates of title issued subsequent thereto having
reference to the same parcels of land; without pronouncement as to
costs.
On October 28, 1963, Lepanto Consolidated Mining Company sold to herein
petitioner Lots No. 1 and 4, with the deed being entered in TCT No. 4314 as
entry No. 12381. Transfer Certificate of Title No. T-5710 was thus issued in
favor of the petitioner which starting since then exercised proprietary rights
over Lots No. 1 and 4.
In the meantime, Rafael Galvez filed his motion for reconsideration against the
order issued by the trial court declaring OCT No. 0-381 null and void. The
motion was denied on January 25, 1965. On appeal, the Court of Appeals

ruled in favor of the Republic of the Philippines in a Resolution promulgated on

August 14, 1973 in CA-G.R. No. 36061-R. 1wphi1.nt
Thereafter, the Court of Appeals issued an Entry of Judgment, certifying that its
decision dated August 14, 1973 became final and executory on October 23,
1973.
On April 22, 1974, the trial court in L.R.C. Case No. N-361 issued a writ of
execution of the judgment which was served on the Register of Deeds, San
Fernando, La Union on April 29, 1974.
Twenty four long years, thereafter, on January 14, 1999, the Office of the
Solicitor General received a letter dated January 11, 1999 from Mr. Victor G.
Floresca, Vice-President, John Hay Poro Point Development Corporation,
stating that the aforementioned orders and decision of the trial court in L.R.C.
No. N-361 have not been executed by the Register of Deeds, San Fernando,
La Union despite receipt of the writ of execution.
On April 21, 1999, the Office of the Solicitor General filed a complaint for
revival of judgment and cancellation of titles before the Regional Trial Court of
the First Judicial Region (Branch 26, San Fernando, La Union) docketed
therein as Civil Case No. 6346 entitled, "Republic of the Philippines, Plaintiff,
versus Heirs of Rafael Galvez, represented by Teresita Tan, Reynaldo
Mamaril, Elisa Bustos, Erlinda Balatbat, Regina Bustos, Shipside Incorporated
and the Register of Deeds of La Union, Defendants."
The evidence shows that the impleaded defendants (except the Register of
Deeds of the province of La Union) are the successors-in- interest of Rafael
Galvez (not Reynaldo Galvez as alleged by the Solicitor General) over the
property covered by OCT No. 0-381, namely: (a) Shipside Inc. which is
presently the registered owner in fee simple of Lots No. 1 and 4 covered by
TCT No. T -5710, with a total area of 7,079 square meters; (b) Elisa Bustos,
Jesusito Galvez, and Teresita Tan who are the registered owners of Lot No. 2
of OCT No. 0-381; and (c) Elisa Bustos, Filipina Mamaril, Regina Bustos and
Erlinda Balatbat who are the registered owners of Lot No. 3 of OCT No. 0-381,
now covered by TCT No. T-4916, with an area of 1,583 square meters.
In its complaint in Civil Case No.6346, the Solicitor General argued that since
the trial court in LRC Case No. 361 had ruled and declared OCT No. 0-381 to
be null and void, which ruling was subsequently affirmed by the Court of
Appeals, the defendants-successors-in-interest of Rafael Galvez have no valid
title over the property covered by OCT No. 0-381, and the subsequent Torrens
titles issued in their names should be consequently cancelled.
On July 22, 1999, petitioner Shipside, Inc. filed its Motion to Dismiss, based on
the following grounds: (1) the complaint stated no cause of action because only

final and executory judgments may be subject of an action for revival of

judgment; (2) .the plaintiff is not the real party-in-interest because the real
property covered by the Torrens titles sought to be cancelled, allegedly part of
Camp Wallace (Wallace Air Station), were under the ownership and
administration of the Bases Conversion Development Authority (BCDA) under
Republic Act No. 7227; (3) plaintiff's cause of action is barred by prescription;
{4) twenty-five years having lapsed since the issuance of the writ of execution,
no action for revival of judgment may be instituted because under Paragraph 3
of Article 1144 of the Civil Code, such action may be brought only within ten
(10) years from the time the judgment had been rendered.
An opposition to the motion to dismiss was filed by the Solicitor General on
August 23, 1999, alleging among others, that: (1) the real party-in-interest is
the Republic of the Philippines; and (2) prescription does not run against the
State.
On August 31, 1999, the trial court denied petitioner's motion to dismiss and on
October 14, 1999, its motion for reconsideration was likewise turned down.
On October 21, 1999, petitioner instituted a petition for certiorari and
prohibition with the Court of Appeals, docketed therein as CA-G.R. SP No.
55535, on the ground that the orders of the trial court denying its motion to
dismiss and its subsequent motion for reconsideration were issued in excess of
jurisdiction.
On November 4, 1999, the Court of Appeals dismissed the petition in CA-G.R.
SP No. 55535 on the ground that the verification and certification in the
petition, tinder the signature of Lorenzo Balbin, Jr., was made without authority,
there being no proof therein that Balbin was authorized to institute the petition
for and in behalf and of petitioner.
On May 23, 2000, the Court of Appeals denied petitioner's, motion for
reconsideration on the grounds that: (1) a complaint filed on behalf of a
corporation can be made only if authorized by its Board of Directors, and in the
absence thereof, the petition cannot prosper and be granted due course; and
(2) petitioner was unable to show that it had substantially complied with the
rule requiring proof of authority to institute an action or proceeding.
Hence, the instant petition.
In support of its petition, Shipside, Inc. asseverates that:
1. The Honorable Court of Appeals gravely abused its discretion in
dismissing the petition when it made a conclusive legal presumption
that Mr. Balbin had no authority to sign the petition despite the clarity
of laws, jurisprudence and Secretary's certificate to the contrary;

2. The Honorable Court of Appeals abused its discretion when it

dismissed the petition, in effect affirming the grave abuse of discretion
committed by the lower court when it refused to dismiss the 1999
Complaint for Revival of a 1973 judgment, in violation of clear laws and
jurisprudence.
Petitioner likewise adopted the arguments it raised in the petition' and
comment/reply it filed with the Court of Appeals, attached to its petition as
Exhibit "L" and "N", respectively.
In his Comment, the Solicitor General moved for the dismissal of the instant
petition based on the following considerations: (1) Lorenzo Balbin, who signed
for and in behalf of petitioner in the verification and certification of non-forum
shopping portion of the petition, failed to show proof of his authorization to
institute the petition for certiorari and prohibition with the Court of Appeals, thus
the latter court acted correctly in dismissing the same; (2) the real party-ininterest in the case at bar being the Republic of the Philippines, its claims are
imprescriptible.
In order to preserve the rights of herein parties, the Court issued a temporary
restraining order on June 26, 2000 enjoining the trial court from conducting
further proceedings in Civil Case No. 6346.
The issues posited in this case are: (1) whether or not an authorization from
petitioner's Board of Directors is still required in order for its resident manager
to institute or commence a legal action for and in behalf of the corporation; and
(2) whether or not the Republic of the Philippines can maintain the action for
revival of judgment herein.
We find for petitioner.
Anent the first issue:
The Court of Appeals dismissed the petition for certiorari on the ground that
Lorenzo Balbin, the resident manager for petitioner, who was the signatory in
the verification and certification on non-forum shopping, failed to show proof
that he was authorized by petitioner's board of directors to file such a petition.
A corporation, such as petitioner, 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
(Premium Marble Resources, Inc. v. CA, 264 SCRA 11 [1996]). 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.

the relaxation of the rule requiring verification and certification on non-forum

shopping.

It is undisputed that on October 21, 1999, the time petitioner's Resident

Manager Balbin filed the petition, there was no proof attached thereto that
Balbin was authorized to sign the verification and non-forum shopping
certification therein, as a consequence of which the petition was dismissed by
the Court of Appeals. However, subsequent to such dismissal, petitioner filed a
motion for reconsideration, attaching to said motion a certificate issued by its
"board secretary stating that on October 11, 1999, or ten days prior to the filing
of the petition, Balbin had been authorized by petitioner's board of directors to
file said petition.

In the instant case, the merits of petitioner' case should be considered special
circumstances or compelling reasons that justify tempering the requirement in
regard to the certificate of non-forum shopping. Moreover, in Loyola, Roadway,
and Uy, the Court excused non-compliance with the requirement as to the
certificate of non-forum shopping. With more reason should we allow the
instant petition since petitioner herein did submit a certification on non-forum
shopping, failing only to show proof that the signatory was authorized to do so.
That petitioner subsequently submitted a secretary's certificate attesting that
Balbin was authorized to file an action on behalf of petitioner likewise, mitigates
this oversight.

The Court has consistently held that the requirement regarding verification of a
pleading is formal, not jurisdictional (Uy v. LandBank, G.R. No. 136100, July
24, 2000). Such requirement is simply a condition affecting the form of the
pleading, non-compliance with which does not necessarily render the pleading
fatally defective. Verification is simply intended to secure an assurance that the
allegations in the pleading are true and correct and not the product of the
imagination or a matter of speculation, and that the pleading is filed in good
faith. The court may order the correction of the pleading if verification is lacking
or act on the pleading although it is not verified, if the attending circumstances
are such that strict compliance with the rules may be dispensed with in order
that the ends of justice may thereby be served.
On the other hand, the lack of certification, against forum shopping is generally
not curable by the submission thereof after the filing of the petition. Section 5,
Rule 45 of the 1997 Rules of civil Procedure provides that the failure of the
petitioner to submit the required documents that should accompany the
petition, including the certification against forum shopping, shall be sufficient
ground for the dismissal thereof. The same rule applies to certifications against
forum shopping signed by a person on behalf of a corporation which are
unaccompanied by proof that said signatory is authorized to file a petition on
behalf of the corporation.
In certain exceptional circumstances, however, the Court has allowed the
belated filing of the certification. In Loyola v. Court of Appeals, et. al. (245
SCRA 477 [1995]), the Court considered the filing of the certification one day
after the filing of an election protest as substantial compliance with the
requirement. In Roadway Express, Inc. v. Court of Appeals, et. al. (264 SCRA
696 [1996]), the Court allowed the filing of the certification 14 days before the
dismissal of the petition. In "Uy v. LandBank, supra, the Court had dismissed
Uy's petition for lack of verification and certification against non-forum
shopping. However, it subsequently reinstated the petition after Uy submitted a
motion to admit certification and non-forum shopping certification. In all these
cases, there were special circumstances or compelling "reasons that justified

It must also be kept in mind that while the requirement of the certificate of nonforum shopping is mandatory, nonetheless the requirements must not be
interpreted too literally and thus defeat the objective of preventing the
undesirable practice of forum-shopping (Bernardo v. NLRC, .255 SCRA 108
[1996]). Lastly, technical rules of procedure should be used to promote, not
frustrate justice. While the swift unclogging of court dockets is a laudable
objective, the granting of substantial justice is an even more urgent ideal.
Now to the second issue:
The action instituted by the Solicitor General in the trial court is one for revival
of judgment which is governed by Article 1144(3) of the Civil Code and Section
6, Rule 39 of the 1997 Rules on Civil Procedure. Article 1144(3) provides that
an action upon a judgment "must be brought within 10 years from the time the
right of action accrues." On the other hand, Section 6, Rule 39 provides that a
final and executory judgment or order may be executed on motion within five
(5) years from the date of its entry, but that after the lapse of such time, and
before it is barred by the statute of limitations, a judgment may be enforced by
action. Taking these two provisions into consideration, it is plain that an action
for revival of judgment must be brought within ten years from the time said
judgment becomes final.
From the records of this, case, it is clear that the judgment sought to be revived
became final on October 23, 1973. On the other hand, the action for revival of
judgment was instituted only in 1999, or more than twenty-five (25) years after
the judgment had become final. Hence, the action is barred by extinctive
prescription considering that 'such an action can be instituted only within ten
(10) years from the time the cause of action accrues.
The Solicitor General, nonetheless, argues that the State's cause , of action in
the cancellation of the land title issued to petitioner's predecessor-in-interest is

imprescriptible because it is included in Camp Wallace, which belongs to the

government.
The argument is misleading.
While it is true that prescription does not run against the State, the same may
not be invoked by the government in this case since it is no longer interested in
the subject matter. While Camp Wallace may have belonged to the
government at the time Rafael Galvez's title was ordered cancelled in Land
Registration Case No. N-361, the same no longer holds true today.
Republic Act No. 7227, otherwise known as the Bases Conversion and
Development Act of 1992, created the Bases Conversion and Development
Authority Section 4 pertinently provides:
Section 4. Purposes of the Conversion Authority. - The Conversion
Authority shall have the following purposes:
(a) To own, hold and/or administer the military reservations of
John Hay Air Station, Wallace Air Station, O'Donnell
Transmitter Station, San Miguel Naval Communications
Station, Mt. Sta. Rita Station (Hermosa, Bataan) and those
portions of Metro Manila military camps which may be
transferred to it by the President;
Section 2 of Proclamation No. 216, issued on July 27, 1993, also provides:
Section 2. Transfer of Wallace Air Station Areas to the Bases
Conversion and Development Authority. - All areas covered by the
Wallace Air Station as embraced and defined by the 1947 Military
Bases Agreement between the Philippines and the United States of
America, as amended, excluding those covered by Presidential
Proclamations and some 25-hectare area for the radar and
communication station of the Philippine Air Force, are hereby
transferred to the Bases Conversion Development Authority ...
With the transfer of Camp Wallace to the BCDA, the government no longer has
a right or interest to protect. Consequently, the Republic is not a real party in
interest and it may not institute the instant action. Nor may it raise the defense
of imprescriptibility, the same being applicable only in cases where the
government is a party in interest. Under Section 2 of Rule 3 of the 1997 Rules
of Civil Procedure, "every action must be prosecuted or defended in the name
of the real party in interest." To qualify a person to be a real party in interest in
whose name an action must be prosecuted, he must appear to be the present
real owner of the right sought to enforced (Pioneer Insurance v. CA, 175 SCRA
668 [1989]). A real party in interest is the party who stands to be benefited or

injured by the judgment in the suit, or the party entitled to the avails of the suit.
And by real interest is meant a present substantial interest, as distinguished
from a mere expectancy, or a future, contingent, subordinate or consequential
interest (Ibonilla v. Province of Cebu, 210 SCRA 526 [1992]). Being the owner
of the areas covered by Camp Wallace, it is the Bases Conversion and
Development Authority, not the Government, which stands to be benefited if
the land covered by TCT No. T-5710 issued in the name of petitioner is
cancelled.
Nonetheless, it has been posited that the transfer of military reservations and
their extensions to the BCDA is basically for the purpose of accelerating the
sound and balanced conversion of these military reservations into alternative
productive uses and to enhance the benefits to be derived from such property
as a measure of promoting the economic and social development, particularly
of Central Luzon and, in general, the country's goal for enhancement (Section
2, Republic Act No. 7227). It is contended that the transfer of these military
reservations to the Conversion Authority does not amount to an abdication on
the part of the Republic of its interests, but simply a recognition of the need to
create a body corporate which will act as its agent for the realization of its
program. It is consequently asserted that the Republic remains to be the real
party in interest and the Conversion Authority merely its agent.
We, however, must not lose sight of the fact that the BCDA is an entity
invested with a personality separate and distinct from the government. Section
3 of Republic Act No. 7227 reads:
Section 3. Creation of the Bases Conversion and Development
Authority. - There is hereby created a body corporate to be known as
the Conversion Authority which shall have the attribute of perpetual
succession and shall be vested with the powers of a corporation.
It may not be amiss to state at this point that the functions of government have
been classified into governmental or constituent and proprietary or ministrant.
While public benefit and public welfare, particularly, the promotion of the
economic and social development of Central Luzon, may be attributable to the
operation of the BCDA, yet it is certain that the functions performed by the
BCDA are basically proprietary in nature. The promotion of economic and
social development of Central Luzon, in particular, and the country's goal for
enhancement, in general, do not make the BCDA equivalent to the
Government. Other corporations have been created by government to act as
its agents for the realization of its programs, the SSS, GSIS, NAWASA arid the
NIA, to count a few, and yet, the Court has ruled that these entities, although
performing functions aimed at promoting public interest and public welfare, are
not government-function corporations invested with governmental attributes. It
may thus be said that the BCDA is not a mere agency of the Government but a
corporate body performing proprietary functions.

Moreover, Section 5 of Republic Act No. 7227 provides:

Section 5. Powers of the Conversion Authority. - To carry out its
objectives under this Act, the Conversion Authority is hereby vested
with the following powers:
(a) To succeed in its corporate name, to sue and be sued in
such corporate name and to adopt, alter and use a corporate
seal which shall be judicially noticed;
Having the capacity to sue or be sued, it should thus be the BCDA which may
file an action to cancel petitioner's title, not the Republic, the former being the
real party in interest. One having no right or interest to protect cannot invoke
the jurisdiction of the court as a party plaintiff in an action (Ralla v. Ralla, 199
SCRA 495 [1991]). A suit may be dismissed if the plaintiff or the defendant is
not a real party in interest. If the suit is not brought in the name of the real party
in interest, a motion to dismiss may be filed, as was done by petitioner in this
case, on the ground that the complaint states no cause of action (Tanpingco v.
IAC, 207 SCRA 652 [1992]).
However, E.B. Marcha Transport Co., Inc. v. IAC (147 SCRA 276 [1987]) is
cited as authority that the Republic is the proper party to sue for the recovery of
possession of property which at the time of the institution of the suit was no
longer held by the national government but by the Philippine Ports Authority .In
E.B. Marcha, the Court ruled:
It can be said that in suing for the recovery of the rentals, the Republic
of the Philippines, acted as principal of the Philippine Ports Authority,
directly exercising the commission it had earlier conferred on the latter
as its agent. We may presume that, by doing so, the Republic of the
Philippines did not intend .to retain the said rentals for its own use,
considering that by its voluntary act it had transferred the land in
question to the Philippine Ports Authority effective July 11, 1974. The
Republic of the Philippines had simply sought to assist, not supplant,
the Philippine Ports Authority, whose title to the disputed property it
continues to recognize, We may expect then that the said rentals, once
collected by the Republic of the Philippines, shall be turned over by it
to the Philippine Ports Authority conformably to the purposes of P.D.
No. 857.
E.B. Marcha is, however, not on all fours with the case at bar. In the former,
the Court considered the Republic a proper party to sue since the claims of the
Republic and the Philippine Ports Authority against the petitioner therein were
the same. To dismiss the complaint in E.B. Marcha would have brought
needless delay in the settlement of the matter since the PPA would have to
refile the case on the same claim already litigated upon. Such is not the case

here since to allow the government to sue herein enables it to raise the issue
of imprescriptibility, a claim which is not available to the BCDA. The rule that
prescription does not run against the State does not apply to corporations or
artificial bodies created by the State for special purposes, it being said that
when the title of the Republic has been divested, its grantees, although artificial
bodies of its own creation, are in the same category as ordinary persons
(Kingston v. LeHigh Valley Coal Co., 241 Pa 469). By raising the claim of
imprescriptibility, a claim which cannot be raised by the BCDA, the
Government not only assists the BCDA, as it did in E.B. Marcha, it even
supplants the latter, a course of action proscribed by said case.
Moreover, to recognize the Government as a proper party to sue in this case
would set a bad precedent as it would allow the Republic to prosecute, on
behalf of government-owned or controlled corporations, causes of action which
have already prescribed, on the pretext that the Government is the real party in
interest against whom prescription does not run, said corporations having been
created merely as agents for the realization of government programs.
Parenthetically, petitioner was not a party to the original suit for cancellation of
title commenced by the Republic twenty-seven years for which it is now being
made to answer, nay, being made to suffer financial losses.
It should also be noted that petitioner is unquestionably a buyer in good faith
and for value, having acquired the property in 1963, or 5 years after the
issuance of the original certificate of title, as a third transferee. If only not to do
violence and to give some measure of respect to the Torrens System,
petitioner must be afforded some measure of protection.
One more point.
Since the portion in dispute now forms part of the property owned and
administered by the Bases Conversion and Development Authority, it is
alienable and registerable real property.
We find it unnecessary to rule on the other matters raised by the herein parties.
WHEREFORE, the petition is hereby granted and the orders dated August 31,
1999 and October 4, 1999 of the Regional Trial, Court of the First National
Judicial Region (Branch 26, San Fernando, La Union) in Civil Case No. 6346
entitled "Republic of the Philippines, Plaintiff, versus Heirs of Rafael Galvez, et.
al., Defendants" as well as the resolutions promulgated on November 4, 1999
and May 23, 2000 by the Court of Appeals (Twelfth Division) in
CA-G.R. SP No. 55535 entitled "Shipside, Inc., Petitioner versus Ron. Alfredo
Cajigal, as Judge, RTC, San Fernando, La Union, Branch 26, and the Republic
of the Philippines, Respondents" are hereby reversed and set aside. The

complaint in Civil Case No. 6346, Regional Trial Court, Branch 26, San
Fernando City, La Union entitled "Republic of the Philippines, Plaintiff, versus
Heirs of Rafael Galvez, et al." is ordered dismissed, without prejudice to the
filing of an appropriate action by the Bases Development and Conversion
Authority.
SO ORDERED.
Vitug, Panganiban, Gonzaga-Reyes, and Sandoval-Gutierrez, JJ., concur.

On August 25, 1997, the Board of Directors of Zomer Development Company,

Inc. (petitioner) approved a resolution authorizing it to apply for and obtain a
credit line with respondent International Exchange Bank (IEB) in the amount of
P60,000,000 as well as temporary excesses or permanent increases thereon
1
as may be approved by IEB from time to time. The Board of Directors also
authorized petitioner to assign, pledge, or mortgage its properties as security
for this credit line; and to secure and guarantee the term loan and other credit
2
facility of IDHI Prime Aggregates Corporation (Prime Aggregates) with IEB.
Prime Aggregates obtained on August 26, 1997 a term loan from IEB in the
3
amount of P60,000,000. On September 2, 1997, petitioner, through its
Treasurer Amparo Zosa (Amparo) and its General Manager Manuel Zosa, Jr.
(Zosa), executed a real estate mortgage covering three parcels of land (the
real estate mortgage) in favor of IEB to secure
1. The payment of all loans, overdrafts, credit lines and other credit
facilities or accommodations obtained or hereinafter obtained by the
MORTGAGOR and/or by IDHI Prime Aggregates Corporation
(hereinafter referred to as DEBTOR)
2. The payment of all interests, charges, penalties, reimbursements
and other obligations owing by the MORTGAGOR and/or DEBTOR to
the MORTGAGEE whether direct or indirect, principal or secondary;
absolute or contingent as appearing in the accounts, books and
records of the MORTGAGEE.
3. The payment of all obligations of the MORTGAGOR and/or
DEBTOR of whatever kind or nature whether such obligations have
been contracted before, during, or after the constitution of [the]
MORTGAGE.
4. In case the MORTGAGOR and/or DEBTOR incurs subsequent
obligations of whatever kind or nature whether such obligations, as
extension thereof, or as new loans or is given any other kind of
accommodations, the payment of said obligations, and/or
accommodations without the necessity of executing new agreements.

G.R. No. 150694

March 13, 2009

ZOMER DEVELOPMENT COMPANY, INC. Petitioner,

vs.
INTERNATIONAL EXCHANGE BANK and SHERIFF IV ARTHUR R.
CABIGON, Respondents.
DECISION
CARPIO MORALES, J.:

5. The faithful and strict performance and compliance by the

MORTGAGOR and/or DEBTOR of all the terms and conditions of the
MORTGAGE, the credit agreements, promissory notes and other loan
documents and agreements evidencing the loan, overdrafts, credit
lines and other credit accommodations granted to the MORTGAGOR
and/or DEBTOR; including all amendments thereon, such as but not
limited to changes in the interest rates, penalties, charges, or fees;
acceleration of payments; and the like.

x x x x (Emphasis, italics and underscoring supplied)

mortgage its properties to secure only a P60,000,000 term loan and one credit
17
facility of Prime Aggregates.

Prime Aggregates subsequently obtained several loans from IEB from

5
September 1997 until September 1998.
Prime Aggregates failed to settle its outstanding obligation which stood at
6
P90,267,854.96 and US$211,547.12 as of September 15, 2000, drawing IEB
to file a petition for extra-judicial foreclosure of mortgage before the Regional
Trial Court (RTC) of Cebu City.
Respondent Sheriff IV Arthur R. Cabigon (Cabigon) having issued on October
7
18, 2000 a Notice of Extra-Judicial Foreclosure and Sale scheduled on
8
November 28, 2000, petitioner filed a complaint for Injunction with application
for writ of preliminary injunction/temporary restraining order before the Cebu
City RTC, alleging that the real estate mortgage was null and void because
Amparo and Zosa were authorized to execute it to secure only one obligation
of Prime Aggregates. Petitioner thus prayed

In the meantime, Branch 15 of the Cebu City RTC to which Civil Case No.
CEB-25762 was re-raffled after the Presiding Judge of Branch 9 inhibited
18
himself in the case, dismissed petitioners Third Amended Complaint by
Order of September 10, 2001. Petitioner appealed this Order to the Court of
Appeals which docketed it as CA-G.R. CV No. 73063.
19

By Decision of October 30, 2001, the appellate court, acting on the certiorari
case filed by petitioners, denied it due course as it found that the trial court
committed no grave abuse of discretion in denying petitioners prayer for
20
preliminary injunction. It brushed aside petitioners arguments that the real
estate mortgage was ultra vires and that Amparo and Zosa were only
authorized to mortgage petitioners properties to secure the P60,000,000 term
loan and one credit facility of Prime Aggregates.
Hence, the present petition

x x x that after due notice and hearing, judgment be rendered declaring the real
estate mortgage and its extrajudicial foreclosure sale as null and void and that
defendant bank be sentenced to pay plaintiff the sum of P100,000.00 as
attorneys fees and P100,000.00 as litigation expenses.
In the meantime, it is most respectfully prayed that a writ of preliminary
injunction/TRO be issued enjoining the extrajudicial foreclosure sale of
plaintiffs properties scheduled on November 28, 2000 or December 5, 2000.
. . . that after trial, the writ of preliminary injunction be made permanent. x x x
(Emphasis and underscoring supplied)

The complaint, docketed as Civil Case No. CEB-25762, was amended on

November 15, 2000.
Branch 9 of the Cebu City RTC denied petitioners prayer for a writ of
10
11
preliminary injunction. Petitioner filed a Motion for Reconsideration and a
12
Motion for Admission of a Second Amended Complaint, albeit it later filed a
Motion to Withdraw Second Amended Complaint and to admit Third Amended
13
14
Complaint. The trial court denied petitioners Motion for Reconsideration.
Petitioner assailed the trial courts orders denying its prayer for the issuance of
15
a writ of preliminary injunction before the Court of Appeals via certiorari,
docketed as CA-G.R. SP No. 64390 (certiorari case), alleging, in the main, that
16
the real estate mortgage it executed was null and void for being ultra vires as
it was not empowered to mortgage its properties as security for the payment of
obligations of third parties; and that Amparo and Zosa were authorized to

21

for review faulting the Court of Appeals in

I X X X NOT HOLDING THAT THE JUDGE WHO DENIED PETITIONERS

APPLICATION FOR INJUNCTION WAS A BIASED AND PARTIAL JUDGE AS
RESPONDENTS WERE GIVEN A COPY OF THE ORDER ON MARCH 2,
2001 WHEN IT WAS SIGNED BY THE JUDGE BUT BEFORE ITS OFFICIAL
RELEASE ON MARCH 5, 2001.
II X X X USING THE DECISION OF THIS HONORABLE COURT IN THE
CASE OF UNION BANK V. COURT OF APPEALS, ET. AL., 311 SCRA 795 IN
SAYING THAT PETITIONER IS NOT ENTITLED TO A WRIT OF
PRELIMINARY INJUNCTION INSTEAD OF USING THE CASE OF
REPUBLIC V. COURT OF APPEALS, 324 SCRA 569 WHEREIN THIS
HONORABLE COURT HELD THAT EVEN P.D. 385 CANNOT BE USED AS A
SHIELD TO STOP BY INJUNCTION THE FORECLOSURE OF A
MORTGAGE WHERE THE VERY PROPRIETY OF SAID FORECLOSURE IS
IN SERIOUS DOUBT WHICH IS THE SAME ISSUE RAISED IN THE CASE
AT BAR.
III X X X HOLDING THAT [PRIME AGGREGATES] IS A SUBSIDIARY OF
PETITIONER IN THE ABSENCE OF A FINDING THAT PETITIONER OWNS
ANY SHARE IN [PRIME AGGREGATES].
IV X X X NOT HOLDING THAT THE SECRETARYS CERTIFICATE OF
PETITIONER WAS NULL AND VOID FOR NOT PUTTING ANY LIMITATION
OF THE AMOUNT OF THE OBLIGATION OF [PRIME AGGREGATES] TO BE
SECURED BY A THIRD PARTY MORTGAGE OF ITS PROPERTIES

25

V X X X NOT HOLDING THAT THE THIRD PARTY REAL ESTATE

MORTGAGE EXECUTED BY THE AGENTS OF PETITIONER IN FAVOR OF
PRIVATE RESPONDENT IS NULL AND VOID BECAUSE THEY EXCEEDED
THEIR AUTHORITY IN SIGNING THE SAME.

In its Reply, petitioner argues that when Branch 15 of the Cebu City RTC
dismissed the Third Amended Complaint in Civil Case No. CEB-25762 on
September 10, 2001, it no longer had jurisdiction over it because said Branch
had on August 14, 2001 been designated as a drug court.

VI X X X NOT CONSTRUING STRICTLY AGAINST PRIVATE

RESPONDENT THE SECRETARYS CERTIFICATE AND THIRD PARTY
REAL ESTATE MORTGAGE WHICH WERE ALL DOCUMENTS OF
ADHESION AND ALL PREPARED BY IT AND TO EFFECT THE LEAST
TRANSMISSION OF RIGHTS PURSUANT TO ARTICLE 1378 OF THE NEW
CIVIL CODE SINCE THE THIRD PARTY REAL ESTATE MORTGAGE IS A
GRATUITOUS CONTRACT WHICH WAS EXECUTED PURELY FOR
ACCOMODATION OF [PRIME AGGREGATES].

Petitioner goes on to argue that even if the acts sought to be restrained have
already been committed, since they are continuing in nature and in derogation
of its rights at the outset, preliminary mandatory injunction may still be availed
of to restore the status quo, citing Manila Electric Railroad and Light Company
26
v. del Rosario and Jose.

VII X X X NOT LAYING THE BLAME ON PRIVATE RESPONDENT IN

MAKING THE AGENTS OF PETITIONER SIGN AN ILLEGAL CONTRACT
SINCE IT WAS VERY WELL AWARE OF THEIR AUTHORITY AS ALL THE
DOCUMENTS WERE ITS FORMS, PRE-PRINTED AND PREPARED BY IT.
VIII X X X HOLDING THAT THE PETITIONER RATIFIED BY INACTION
THE ILLEGAL CONTRACT EXECUTED BY ITS AGENTS SINCE THE
PRIVATE RESPONDENT WAS VERY WELL AWARE OF THE EXTENT OF
THEIR AUTHORITY.
IX MAKING CONFLICTING FINDINGS OF FACTS.

22

Acting on petitioners appeal from the dismissal by Branch 15 of its Third

Amended Complaint, the appellate court, by Decision of April 14, 2005, set
aside the trial courts order of dismissal and ordered the reinstatement of said
complaint to the docket of Branch 15 of the Cebu City RTC.
The records show that, indeed, petitioners mortgaged properties were already
foreclosed, as shown by the Certificate of Sale issued by Cabigon on
27
November 19, 2001. And they also show that ownership of the lands-subject
of the real estate mortgage had been consolidated and transfer certificates of
28
title had been issued in IEBs name. It is on this score that the Court finds
petitioners prayer for a writ of preliminary injunction moot and academic. This
leaves it unnecessary for the Court to still dwell on petitioners argument that it
was not, under its By-Laws, empowered to mortgage its properties to secure
the obligation of a third party. In any event, the Court finds well-taken the
appellate courts following disposition of such argument:

23

Respondents, in their Comment dated February 27, 2002, move for the
dismissal of the petition for being moot and academic, alleging that:
On October 8, 2001 [sic], [petitioners] principal action for annulment of real
estate mortgage was dismissed by the trial court and that said action is now
on appeal with the Court of Appeals x x x [.]
On November 19, 2001, [petitioners] mortgaged properties were foreclosed
by [IEB]. In fact, as the highest bidder in the said foreclosure sale and in view
of the passage of the new General Banking Law (which allows banks to
consolidate its [sic] title within a shorter period if the mortgagor of a foreclosed
property is a corporation), iBank had consolidated its title on the mortgaged
properties.
[Petitioners] application for issuance of writ of preliminary injunction, the
subject of the instant appeal purportedly under Rule 45 of the Rules of Court,
cannot survive the dismissal of its principal action as well as the
foreclosure and consolidation in [IEB] name of its mortgaged
24
properties. (Emphasis and underscoring supplied)

We do agree that the Petitioner, under its "By-Laws," is not empowered to

mortgage its properties as a security for the payment of the obligations of third
parties. This is on the general premise that the properties of a corporation are
regarded as held in trust for the payment of corporate creditors and not for the
creditors of third parties. However, the Petitioner is not proscribed from
mortgaging its properties as security for the payment of obligations of third
parties. In an opinion of the Securities and Exchange Commission, dated April
15, 1987, it declared that a private corporation, by way of exceptions, may give
a third party mortgage:
"1. When the mortgage of corporate assets/properties shall be done in
the furtherance of the interest of the corporation and in the usual and
regular course of its business; and
2. To secure the debt of a subsidiary."
While admittedly, the "Opinion" of the Securities & Exchange Commission
may not be conclusive on the Respondent Court, however, admittedly the
same is of persuasive effect.

In the present recourse, the Respondent Court found that not only is Prime
Aggregates a subsidiary of the Petitioenr but that the Petitioner appeared to
be a "family" corporation:
"a. The plaintiff appears to be a family corporation. The incorporators
and stockholders and the membership of the board of directors are
Zosa family. x x x
b. Francis and Rolando Zosa are directors of [Prime Aggregates] and
of plaintiff corporation x x x
c. The REM was executed by Amparo Zosa who was the treasurer of
plaintiff and Manuel Zosa, the General Manager, both are
directors/stockholders of the plaintiff. Amparo Zosa is the biggest
stockholder and is the mother of practically all the other stockholders
of plaintiff. Manuel Zosa, Jr. is the General Manager and a son of
Amparo.1avvphi1
d. The Corporate Secretary of plaintiff and [Prime Aggregates] are
members of the Zosa family. The Corporate Secretary of [Prime
Aggregates] is also the daughter of Francis Zosa, president of plaintiff.
e. The President of plaintiff corporation, Francis Zosa and the
president of [Prime Aggregates], Rolando Zosa, are brothers (aside
from being common directors of both corporations.)
We agree with the Respondent Court.
The Petitioners shrill incantations that the "Resolution", approved by its
Board of Directors, authorizing its Treasurer and General Manager to execute
a "Real Estate Mortgage" as security for the payment of the account of Prime
Aggregates, a sister corporation, is not for its best interest, is a "puzzlement"
xxx. Since when is a private corporation, going to the aid of a sister
corporation, not for the best interest of both corporation? For in doing so, the
two (2) corporations are enhancing, boosting and promoting a common
interest, the interest of "family" having ownership of both corporations. In the
second place, Courts are loathe to overturn decisions of the management of a
corporation in the conduct of its business via its Board of Directors x x x.
xxxx
There is no evidence on record that the "Real Estate Mortgage" was executed
by the Petitioner and the Private Respondent to prejudice corporate creditors
of the Petitioner or will result in the infringement of the trust fund doctrine or
hamper the continuous business operation of the Petitioner or that the Prime
Aggregates was insolvent or incapable of paying the Private Respondent.

Indeed, the latter approved Prime Aggregates loan availments and credit
facilities after its investigation of the financial capability of Prime Aggregates
29
and its capacity to pay its account to the Private respondent.
xxxx
[U]nder the "Resolution" of the Board of Directors, it authorized its Treasurer
and General Manager to execute a "Real Estate Mortgage" over its properties
as security for the "term loan and credit facility" of Prime Aggregates. The
maximum amounts of such term loan and credit facility were not fixed in the
"Resolution". The term "credit facility" is a broad term in credit business
transactions to denote loans, pledges, mortgages, trust receipt transactions
and credit agreements. And then, again, such term loan and/or credit facility
may be granted, by the Private Respondent, in favor of Prime Aggregates, in
trenches or in staggered basis, each disbursement evidenced by separate
agreements depending upon the needs of Prime Aggregates for the
establishment of its sand and gravel plant and port facilities and the purchase
of equipments and machinery for said project. Hence, the "Long Term
Agreements" and "Credit Agreements" executed by Prime Aggregates and
the Private Respondent, with the Petitioners properties, as collateral therefore,
were envisaged in the terms "term loan and credit facility" in the "Resolution"
of the Board of Directors of the Petitioner.
The intention of the Members of the Board of Directors of the Petitioner, in
approving the "Resolution," may be ascertained xxx also from the
contemporaneous and subsequent acts of the Petitioner, the Private
Respondent and Prime Aggregates. Given the factual milieu in the present
recourse, as found and declared by the Respondent Court, there can be no
equivocation that, indeed the Petitioner conformed to and ratified, and hence,
is bound by the execution, by its Treasurer and General Manager, of the "Real
Estate Mortgage" in favor of the Private respondent, with its properties used
as securities for the payment of the credit and loan availments of Prime
Aggregates from the Private Respondent on the basis of the "Resolution"
approved by its Board of Directors. As our Supreme Court declared, ratification
and/or approval by the corporation of the acts of its agents/officers may be
ascertained through x x x the acquiescence in his acts of a particular nature,
with actual or constructive thereof, whether within or beyond the scope of his
ordinary powers.
As it was, the Petitioner finally awoke from its slumber when the Private
Respondent filed its "Petition" for the extra-judicial foreclosure of the "Real
Estate Mortgage", with the Sheriff, and assailed the authority of its Board of
Directors to approve the said "Resolution" and of its Treasurer and General
Manager to execute the deed and brand the said "Resolution" and the said
deed as "ultra vires" and hence, not binding on the Petitioner, and hurried off
to the Respondent Court and prayed for injunctive relief. Before then, the
Petitioner maintained a stoic silence and adopted a "hands off" stance. We find

the Petitioners stance grossly inequitable. We must take heed and pay
obeisance to the equity rule that if one maintains silence when, in conscience
he ought to speak, equity will debar him from speaking when, in conscience,
he ought to remain silent. He who remains silent when he ought to speak
cannot be heard to speak when he ought to be silent. More, the transactions
between the Petitioner and the Private Respondent over its properties are
neither malum in se or malum prohibitum. Hence, the Petitioner cannot hide
behind the cloak of "ultra vires" for a defense.
xxxx
The plea of "ultra vires" will not be allowed to prevail, whether interposed for
or against a corporation, when it will not advance justice but, on the contrary,
will accomplish a legal wrong to the prejudice of another who acted in good
30
faith. (Underscoring and emphasis in the original)
WHEREFORE, the petition is DISMISSED.
Costs against petitioner.
SO ORDERED.
CONCHITA CARPIO MORALES
Associate Justice

G.R. No. L-18062

February 28, 1963

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
ACOJE MINING COMPANY, INC., defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.

Jalandoni & Jamir for defendant-appellant.
BAUTISTA ANGELO, J.:
On May 17, 1948, the Acoje Mining Company, Inc. wrote the Director of Posts
requesting the opening of a post, telegraph and money order offices at its
mining camp at Sta. Cruz, Zambales, to service its employees and their
families that were living in said camp. Acting on the request, the Director of
Posts wrote in reply stating that if aside from free quarters the company would
provide for all essential equipment and assign a responsible employee to
perform the duties of a postmaster without compensation from his office until
such time as funds therefor may be available he would agree to put up the
offices requested. The company in turn replied signifying its willingness to
comply with all the requirements outlined in the letter of the Director of Posts
requesting at the same time that it be furnished with the necessary forms for
the early establishment of a post office branch.
On April 11, 1949, the Director of Posts again wrote a letter to the company
stating among other things that "In cases where a post office will be opened
under circumstances similar to the present, it is the policy of this office to have
the company assume direct responsibility for whatever pecuniary loss may be
suffered by the Bureau of Posts by reason of any act of dishonesty,
carelessness or negligence on the part of the employee of the company who is
assigned to take charge of the post office," thereby suggesting that a resolution
be adopted by the board of directors of the company expressing conformity to
the above condition relative to the responsibility to be assumed buy it in the
event a post office branch is opened as requested. On September 2, 1949, the
company informed the Director of Posts of the passage by its board of
directors of a resolution of the following tenor: "That the requirement of the
Bureau of Posts that the Company should accept full responsibility for all cash
received by the Postmaster be complied with, and that a copy of this resolution
be forwarded to the Bureau of Posts." The letter further states that the
company feels that that resolution fulfills the last condition imposed by the
Director of Posts and that, therefore, it would request that an inspector be sent
to the camp for the purpose of acquainting the postmaster with the details of
the operation of the branch office.
The post office branch was opened at the camp on October 13, 1949 with one
Hilario M. Sanchez as postmaster. He is an employee of the company. On May
11, 1954, the postmaster went on a three-day leave but never returned. The
company immediately informed the officials of the Manila Post Office and the
provincial auditor of Zambales of Sanchez' disappearance with the result that
the accounts of the postmaster were checked and a shortage was found in the
amount of P13,867.24.

The several demands made upon the company for the payment of the
shortage in line with the liability it has assumed having failed, the government
commenced the present action on September 10, 1954 before the Court of
First Instance of Manila seeking to recover the amount of Pl3,867.24. The
company in its answer denied liability for said amount contending that the
resolution of the board of directors wherein it assumed responsibility for the act
of the postmaster is ultra vires, and in any event its liability under said
resolution is only that of a guarantor who answers only after the exhaustion of
the properties of the principal, aside from the fact that the loss claimed by the
plaintiff is not supported by the office record.
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
After trial, the court a quo found that, of the amount claimed by plaintiff totalling
P13,867.24, only the sum of P9,515.25 was supported by the evidence, and so
it rendered judgment for the plaintiff only for the amount last mentioned. The
court rejected the contention that the resolution adopted by the company is
ultra vires and that the obligation it has assumed is merely that of a guarantor.
Defendant took the present appeal.
The contention that the resolution adopted by the company dated August 31,
1949 is ultra vires in the sense that it has no authority to act on a matter which
may render the company liable as a guarantor has no factual or legal basis. In
the first place, it should be noted that the opening of a post office branch at the
mining camp of appellant corporation was undertaken because of a request
submitted by it to promote the convenience and benefit of its employees. The
idea did not come from the government, and the Director of Posts was
prevailed upon to agree to the request only after studying the necessity for its
establishment and after imposing upon the company certain requirements
intended to safeguard and protect the interest of the government. Thus, after
the company had signified its willingness to comply with the requirement of the
government that it furnish free quarters and all the essential equipment that
may be necessary for the operation of the office including the assignment of an
employee who will perform the duties of a postmaster, the Director of Posts
agreed to the opening of the post office stating that "In cases where a post
office will be opened under circumstances similar to the present, it is the policy
of this office to have the company assume direct responsibility for whatever
pecuniary loss may be suffered by the Bureau of Posts by reason of any act of
dishonesty, carelessness or negligence on the part of the employee of the
company who is assigned to take charge of the post office," and accepting this
condition, the company, thru its board of directors, adopted forthwith a
resolution of the following tenor: "That the requirement of the Bureau of Posts
that the company should accept full responsibility for all cash received by the

Postmaster, be complied with, and that a copy of this resolution be forwarded

to the Bureau of Posts." On the basis of the foregoing facts, it is evident that
the company cannot now be heard to complain that it is not liable for the
irregularity committed by its employee upon the technical plea that the
resolution approved by its board of directors is ultra vires. The least that can be
said is that it cannot now go back on its plighted word on the ground of
estoppel.
The claim that the resolution adopted by the board of directors of appellant
company is an ultra vires act cannot also be entertained it appearing that the
same covers a subject which concerns the benefit, convenience and welfare of
its employees and their families. While as a rule an ultra vires act is one
committed outside the object for which a corporation is created as defined by
the law of its organization and therefore beyond the powers conferred upon it
by law (19 C.J.S., Section 965, p. 419), there are however certain corporate
acts that may be performed outside of the scope of the powers expressly
conferred if they are necessary to promote the interest or welfare of the
corporation. Thus, it has been held that "although not expressly authorized to
do so a corporation may become a surety where the particular transaction is
1
reasonably necessary or proper to the conduct of its business," and here it is
undisputed that the establishment of the local post office is a reasonable and
proper adjunct to the conduct of the business of appellant company. Indeed,
such post office is a vital improvement in the living condition of its employees
and laborers who came to settle in its mining camp which is far removed from
the postal facilities or means of communication accorded to people living in a
city or municipality..
Even assuming arguendo that the resolution in question constitutes an ultra
vires act, the same however is not void for it was approved not in contravention
of law, customs, public order or public policy. The term ultra vires should be
distinguished from an illegal act for the former is merely voidable which may be
enforced by performance, ratification, or estoppel, while the latter is void and
2
cannot be validated. It being merely voidable, an ultra vires act can be
enforced or validated if there are equitable grounds for taking such action.
Here it is fair that the resolution be upheld at least on the ground of estoppel.
On this point, the authorities are overwhelming:
The weight of authority in the state courts is to the effect that a
transaction which is merely ultra vires and not malum in se or malum
prohibitum, is, if performed by one party, not void as between the
parties to all intents and purposes, and that an action may be brought
directly on the transaction and relief had according to its terms. (19
C.J.S., Section 976, p. 432, citing Nettles v. Rhett, C.C.A.S.C., 94 F.
2d, reversing, D.C., 20 F. Supp. 48)
This rule is based on the consideration that as between private
corporations, one party cannot receive the benefits which are

embraced in total performance of a contract made with it by another

party and then set up the invalidity of the transaction as a defense."
(London & Lancashire Indemnity Co. of America v. Fairbanks Steam
Shovel Co., 147 N.E. 329, 332, 112 Ohio St. 136.)

RIZAL, Petitioners,
vs.
INLAND CONSTRUCTION AND DEVELOPMENT CORP., Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x

The defense of ultra vires rests on violation of trust or duty toward

stockholders, and should not be entertained where its allowance will
do greater wrong to innocent parties dealing with corporation..

G.R. No. 123822

The acceptance of benefits arising from the performance by the other

party may give rise to an estoppel precluding repudiation of the
transaction. (19 C.J.S., Section 976, p. 433.)

WESTMONT BANK (formerly ASSOCIATED CITIZENS BANK and now

UNITED OVERSEAS BANK, PHILS.), Petitioner,
vs.
COURT OF APPEALS and INLAND CONSTRUCTION AND DEVELOPMENT
CORP., Respondents.

The current of modern authorities favors the rule that where the ultra
vires transaction has been executed by the other party and the
corporation has received the benefit of it, the law interposes an
estoppel, and will not permit the validity of the transaction or contract
to be questioned, and this is especially true where there is nothing in
the circumstances to put the other party to the transaction on notice
that the corporation has exceeded its powers in entering into it and has
in so doing overstepped the line of corporate privileges. (19 C.J.S.,
Section 977, pp. 435-437, citing Williams v. Peoples Building & Loan
Ass'n, 97 S.W. 2d 930, 193 Ark. 118; Hays v. Galion Gas Light Co., 29
Ohio St. 330)
Neither can we entertain the claim of appellant that its liability is only that of a
guarantor. On this point, we agree with the following comment of the court a
quo: "A mere reading of the resolution of the Board of Directors dated August
31, 1949, upon which the plaintiff based its claim would show that the
responsibility of the defendant company is not just that of a guarantor. Notice
that the phraseology and the terms employed are so clear and sweeping and
that the defendant assumed 'full responsibility for all cash received by the
Postmaster.' Here the responsibility of the defendant is not just that of a
guarantor. It is clearly that of a principal."
WHEREFORE, the decision appealed from is affirmed. No costs.
Bengzon, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera,
Paredes, Dizon, Regala and Makalintal, JJ. concur.

March 23, 2009

DECISION
CARPIO MORALES, J.:
Inland Construction and Development Corp. (Inland) obtained various loans
and other credit accommodations from petitioner, then known as Associated
Citizens Bank ([the bank] which later became United Overseas Bank, Phils.,
and still later Westmost Bank) in 1977.
To secure the payment of its obligations, Inland executed real estate
mortgages over three real properties in Pasig City covered by Transfer
1
Certificates of Title Nos. 4820, 4821 and 4822.
Inland likewise issued promissory notes in favor of the bank, viz:
Promissory Note No. BD-2739-77
Amount: P155,000.00
Due Date: January 2, 1978

Promissory Note No. BD-2884-77

Amount: P880,000.00
3

Due Date: February 23, 1978

Promissory Note No. BD-2997

Amount: P60,000.00
G.R. No. 123650

March 23, 2009

4

Due Date: March 22, 1978 (Emphasis supplied)

WESTMONT BANK (formerly ASSOCIATED CITIZENS BANK and now
UNITED OVERSEAS BANK, PHILS.) AND THE PROVINCIAL SHERIFF OF

When the first and second promissory notes fell due, Inland defaulted in its
payments. It, however, authorized the bank to debit P350,000 from its savings
5
account to partially satisfy its obligations.

Answering the amended complaint, the bank underscored that it "had no

knowledge, much less did it give its conformity to the alleged assignment of the
9
obligation covered by PN# BD-2884 [-77]."

It appears that by a Deed of Assignment, Conveyance and Release dated May

2, 1978, Felix Aranda, President of Inland, assigned and conveyed all his rights
and interests at Hanil-Gonzales Construction & Development (Phils.)
Corporation (Hanil-Gonzales Corporation) in favor of Horacio Abrantes
(Abrantes), Executive Vice-President and General Manager of Hanil-Gonzales
Corporation. Under the same Deed of Assignment, it appears that Abrantes
assumed, among other obligations of Inland and Aranda, Promissory Note No.
BD-2884-77 in the amount of P800,000 as shown in the May 26, 1978 Deed of
Assignment of Obligation in which Aranda and Inland, on one hand, and
Abrantes and Hanil-Gonzales Corporation, on the other, forged as follows:

The trial court found that the bank ratified the act of its account officer Calo,
thus:

x x x x.
WHEREAS, among the obligations assumed by Mr. HORACIO C. ABRANTES
[in the May 2, 1978 Deed] is the account of the FIRST PARTY (Aranda and
Inland) in favor of the ASSOCIATED CITIZENS BANK as evidenced by
Promissory Note No. BD-2884-77 in the amount of EIGHT HUNDRED EIGHTY
THOUSAND (P880,000.00) PESOS, x x x x;
WHEREAS, the parties herein have agreed to obtain the conformity of the
ASSOCIATED CITIZENS BANK to the foregoing arrangement x x x x;
NOW, THEREFORE, the herein parties have mutually agreed that the
SECOND PARTY (Abrantes and Hanil-Gonzalez) shall assume full and
complete liability and responsibility for the payment to ASSOCIATED
CITIZENS BANK Promissory Note No. BD-2884-77 x x x x.
THE SECOND PARTY shall make such necessary arrangements with the
ASSOCIATED CITIZENS BANK for the full liquidation of said account, x x x x.
x x x x. (Emphasis and underscoring supplied)
The banks Account Officer, Lionel Calo Jr. (Calo), signed for its conformity to
6
the deed.
On December 14, 1979, Inland was served a Notice of Sheriffs Sale
foreclosing the real estate mortgages over its real properties, prompting it to
file a complaint for injunction against the bank and the Provincial Sheriff of
7
Rizal at the Regional Trial Court (RTC) of Pasig City. This complaint was later
8
amended.

x x x x. Culled from the evidence on record, the Court finds that the defendant
Bank ratified the act of Calo when its Executive Committee failed to repudiate
the assignment within a reasonable time and even approved the request for a
restructuring of Liberty Const. & Dev. Corp./Hanil-Gonzales Construction &
Development Corp.s obligations, which included the P880,000.00 loan (Exhibit
"U" to "X", and its submarkings). Clearly, the assumption of the loan was very
well known to the defendant Bank and the latter posed no objection to it. In
fact, the positive act on the part of the defendant in restructuring the loan of the
assignee attest to its consent in the said transaction. The evidence on record
conveys the fact that the Hanil-Gonzales Const. and Development Corp.
assumed the obligation of the plaintiff on the SECOND NOTE. Later, it asked
the defendant for a restructuring of its loan, including the P880,000.00 loan.
Thereafter, payments were made by the assignee to the defendant Bank. The
preponderance of evidence tilts heavily in favor of the plaintiff claiming that a
10
case of delegacion occurs. (Emphasis and italics supplied; Underscoring in
the original)
It accordingly rendered judgment in favor of Inland by Decision
1992, the dispositive portion of which reads:

11

of March 31,

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against

the defendants, permanently, perpetually and forever restraining and enjoining
the defendants Associated Citizens Bank and the Sheriff of this Court from
proceeding with the foreclosure of and conducting an auction sale on the real
estate covered by and embraced in Transfer Certificates of Title Nos. 4820,
4821 and 4822 of the Register of Deeds of Rizal (now Pasig, Metro Manila)
and to refund to plaintiff the amount of P8,866.89, with legal interest thereon
from the filing of the complaint until full payment, with costs.
SO ORDERED. (Emphasis and underscoring supplied)
The bank appealed the trial courts decision to the Court of Appeals which, by
12
13
Decision of May 31, 1995, modified the same, disposing as follows:
WHEREFORE, the decision appealed from is hereby AFFIRMED only insofar
as it finds appellant Associated Bank to have ratified the Deed of Assignment
(Exhibit "O"), but REVERSED in all other respects, and judgment is
accordingly rendered ordering the plaintiff-appellee Inland Construction and
Development Corporation to pay defendant-appellant Associated Bank the

sum of One Hundred Eighty Six Thousand Two Hundred Forty One Pesos and
Eighty Six Centavos (P186,241.86) with legal interest thereon computed from
December 21, 1979 until the same is fully paid.

The appellate court, however, specifically mentioned that the "lower court erred
when it rendered a decision which permanently, perpetually and forever
restrains the sheriff from proceeding with the threatened foreclosure auction
14
sale of the subject mortgage properties."

No pronouncement as to costs.
SO ORDERED. (Underscoring supplied)
In affirming the observation of the trial court that the bank ratified the
assignment of Inlands Promissory Note No. BD-2884-77, the appellate court
discoursed as follows:
In the instant case, both the assignors (Aranda and Inland) and assignees
(Abrantes and Hanil-Gonzales) in the subject deed of assignment have been
major clients of Associated Bank for several years with accounts amounting to
millions of pesos. For several years, Associated Bank had, either intentionally
or negligently, been habitually clothing Calo with the apparent powers to
perform acts in behalf of the bank. x x x x.
x x x x.
Calo signed the subject deed of assignment on or about May 26, 1978. The
principal obligation covered by the deed involved a hefty sum of eight hundred
eighty thousand pesos (P880,000.00). Despite the enormity of the amount
involved, Associated Bank never made any attempt to repudiate the act of Calo
until almost seven (7) years later, when Mitos C. Olivares, Manager of the
Cash Department of Associated Bank, issued an INTER-OFFICE
MEMORANDUM dated May 20, 1985 which pertinently reads:
"2) Conforme of Associated Bank signed by Lionel Calo Jr. has no bearing
since he has no authority to sign for the bank as he was only an account officer
with no signing authority;
x x x x.
5) I suggest, Mr. Calo be asked to be present at court hearings to explain why
he signed for the bank, knowing his limitations"
The abovequoted inter-office memorandum is addressed internally to the other
offices within Associated Bank. It is not addressed to Inland or any outsider for
that matter. Worse, it was not even offered in evidence by Associated Bank to
give Inland the opportunity to object to or comment on the said document, but
was merely attached as one of the annexes to the banks MEMORANDUM
FOR DEFENDANTS. Obviously, no evidentiary weight may be attached to said
inter-office memorandum, which is even self serving. In fact, it ought not to be
considered at all. (Emphasis and underscoring supplied)

The bank moved for partial reconsideration of the appellate courts decision on
the aspect of its ratification of the Deed of Assignment but the same was
15
denied by Resolution of January 24, 1996.
16

The bank, via two different counsels, filed before this Court separate petitions
for review, G.R. No. 123650, Associated Citizens Bank, et al. v. Court of
Appeals, et al; and G.R. No. 123822, Westmont Bank (formerly Associated
Bank) v. Inland Construction & Development Corp., assailing the same
17
appellate courts decision.1awphi1 Owing to a series of oversight, the petition
in G.R. 123650 was initially dismissed but was later reinstated by Resolution of
June 21, 1999.
18

The records show that Inland failed to file its comment and memorandum on
the petitions.
Both petitions for review impute error on the part of the appellate court in
AFFIRMING THE FINDING OF THE TRIAL COURT THAT PETITIONER
HAVE [SIC] RATIFIED THE DEED OF ASSIGNMENT (EXH. "O").
The bank, which had, as reflected early on, become known as Westmont Bank
(petitioner), maintains that Calo had no authority to bind it in the Deed of
Assignment and that a single, isolated unauthorized act of its agent is not
sufficient to establish that it clothed him with apparent authority. Petitioner adds
that the records fail to disclose evidence of similar acts of Calo executed either
19
in its favor or in favor of other parties. Moreover, petitioner reasserts that the
unauthorized act of Calo never came to its knowledge, hence, it is not
20
estopped from repudiating the Deed of Assignment.
The petitions fail.
The general rule remains that, in the absence of authority from the board of
21
directors, no person, not even its officers, can validly bind a corporation. If a
corporation, however, consciously lets one of its officers, or any other agent, to
act within the scope of an apparent authority, it will be estopped from denying
22
such officers authority.
The records show that Calo was the one assigned to transact on petitioners
behalf respecting the loan transactions and arrangements of Inland as well as
those of Hanil-Gonzales and Abrantes. Since it conducted business through

Calo, who is an Account Officer, it is presumed that he had authority to sign for
the bank in the Deed of Assignment.
Petitioner cannot feign ignorance of the May 26, 1978 Deed of Assignment, the
pertinent portion of which was quoted above. Notably, assignee Abrantes
notified petitioner about his assumption of Inlands obligation. Thus, in his July
26, 1979 letter to petitioner, he wrote:
This refers to the accounts of Liberty Construction and Development
Corporation (LCDC) and our sister-company, Hanil-Gonzalez Construction &
Development Corporation (HGCDC) which as of July 31, 1979 was computed
at P1,814,442.40, inclusive of interest, penalties and fees, net of marginal
deposits. This includes the account of
Inland Construction & Development Corporation which had been assumed by
23
HGCDC. (Emphasis and underscoring supplied)
That petitioner sent the following reply-letter, dated November 29, 1982, to the
above-quoted letter to it of assignee Abrantes indicates that it had full and
complete knowledge of the assumption by Abrantes of Inlands obligation:
We are pleased to advise you that our Executive Committee in its meeting last
November 25, 1982, has approved your request for the restructuring of your
24
outstanding obligations x x x x. (Underscoring supplied)
Respecting this reply-letter of the bank granting Hanil-Gonzales request to
restructure its loans, petitioner, as a banking institution, is expected to have
exercised the highest degree of diligence and meticulousness in the conduct of
its business. When it received the loan restructuring request, with specific
mention of Inlands Promissory Note No. BD-2884-77, petitioner-bank was
under obligation to fastidiously scrutinize such loan account. And since it
clearly approved the request for restructuring, any "uncertainty" that its replyletter approving such request may not thus work to prejudice Hanil-Gonzales or
Inland.
Petitioner relies heavily, however, on the Courts pronouncement in Yao Ka Sin
Trading that it was incumbent upon, in this case, Inland to prove that petitioner
had clothed its account officer with apparent power to conform to the Deed of
25
Assignment.
26

Petitioners simplistic reading of Yao Ka Sin Trading v. Court of Appeals does

not impress. In Yao Ka Sin Trading, the therein respondent cement company
had shown by clear and convincing evidence that its president was not
authorized to undertake a particular transaction. It presented its by-laws stating
that only its board of directors has the power to enter into an agreement or
contract of any kind. The companys board of directors even forthwith issued a

resolution to repudiate the contract. Thus, it was only after the company
successfully discharged its burden that the other party, the therein petitioner
Yao Ka Sin Trading, had to prove that indeed the cement company had clothed
its president with the apparent power to execute the contract by evidence of
similar acts executed in its favor or in favor of other parties.
Unmistakably, the Courts directive in Yao Ka Sin Trading is that a corporation
should first prove by clear evidence that its corporate officer is not in fact
authorized to act on its behalf before the burden of evidence shifts to the other
party to prove, by previous specific acts, that an officer was clothed by the
corporation with apparent authority.
27

It bears noting that in Westmont Bank v. Pronstroller, the therein petitioner

Westmont Bank, through a management committee, proved that it rejected the
letter-agreement entered into by its assistant vice-president. Consequently, the
therein respondent had to prove by citing other instances of the said officers
apparent authority to bind the bank-therein petitioner.1avvphi1
In the present petitions, petitioner-bank failed to discharge its primary burden
of proving that Calo was not authorized to bind it, as it did not present proof
that Calo was unauthorized. It did not present, much less cite, any Resolution
from its Board of Directors or its Charter or By-laws from which the Court could
reasonably infer that he indeed had no authority to sign in its behalf or bind it in
28
the Deed of Assignment. The May 20, 1985 inter-office memorandum stating
that Calo had "no signing authority" remains self-serving as it does not even
form part of petitioners body of evidence.
Thus, the assertion that the petitioner cannot be faulted for its delay in
repudiating the apparent authority of Calo is similarly flawed, there being no
evidence on record that it had actually repudiated such apparent authority. It
should be noted that it was the bank which pleaded that defense in the first
place. What is extant in the records is a reasonable certainty that the bank had
ratified the Deed of Assignment.
The assumption that a ruling on the issue of ratification would affect any and all
foreclosure proceedings on the mortgaged properties remains unfounded. For
29
the challenged appellate courts Decision still mentioned the possibility of
foreclosing on the mortgaged properties as Inland was still indebted to the
bank in the amount of P186, 241.86 covering the other two promissory notes
(No. BD-2739-77 and No. BD-2997) and other obligations that Inland was not
able to satisfy upon maturity.
Both the trial courts and the appellate courts inferences and conclusion that
petitioner ratified its account officers act are thus rationally based on evidence
and circumstances duly highlighted in their respective decisions. Absent any

serious abuse or evident lack of basis or capriciousness of any kind, the lower
30
courts findings of fact are conclusive upon this Court.
WHEREFORE, the petitions are DENIED. The decision of the Court of Appeals
in CA-G.R. CV No. 39634 is AFFIRMED.

G.R. No. 132390

May 21, 2004

BPI FAMILY SAVINGS BANK, INC., petitioner,

vs.
FIRST METRO INVESTMENT CORPORATION, respondent.

Costs against petitioner.

DECISION

SO ORDERED.

SANDOVAL-GUTIERREZ, J.:

CONCHITA CARPIO MORALES

Associate Justice

For our resolution is the instant petition for

of the 1997 Rules of Civil Procedure, as
2
dated July 4, 1997 and Resolution dated
Appeals in CA-G.R. CV No. 44986, "First
BPI Family Bank."

review on certiorari under Rule 45

1
amended, assailing the Decision
January 28, 1998 of the Court of
Metro Investment Corporation vs.

The facts as found by the trial court and affirmed by the Court of Appeals are
as follows:
First Metro Investment Corporation (FMIC), respondent, is an
investment house organized under Philippine laws. Petitioner, Bank of
Philippine Islands Family Savings Bank, Inc. is a banking corporation
also organized under Philippine laws.
On August 25, 1989, FMIC, through its Executive Vice President
Antonio Ong, opened current account no. 8401-07473-0 and deposited
*
METROBANK check no. 898679 of P100 million with BPI Family Bank
(BPI FB) San Francisco del Monte Branch (Quezon City). Ong made
the deposit upon request of his friend, Ador de Asis, a close
acquaintance of Jaime Sebastian, then Branch Manager of BPI FB
San Francisco del Monte Branch. Sebastians aim was to increase the
deposit level in his Branch.
BPI FB, through Sebastian, guaranteed the payment of
P14,667,687.01 representing 17% per annum interest of P100 million
deposited by FMIC. The latter, in turn, assured BPI FB that it will
maintain its deposit of P100 million for a period of one year on
condition that the interest of 17% per annum is paid in advance.
This agreement between the parties was reached through their
communications in writing.
Subsequently, BPI FB paid FMIC 17% interest or P14,667,687.01
upon clearance of the latters check deposit.

However, on August 29, 1989, on the basis of an Authority to Debit

signed by Ong and Ma. Theresa David, Senior Manager of FMIC, BPI
FB transferred P80 million from FMICs current account to the savings
account of Tevesteco Arrastre Stevedoring, Inc. (Tevesteco).

until fully restored. Further, this 17% interest shall itself earn interest at
12% from October 4, 1989 until fully paid.

FMIC denied having authorized the transfer of its funds to Tevesteco,

claiming that the signatures of Ong and David were falsified.
Thereupon, to recover immediately its deposit, FMIC, on September
12, 1989, issued BPI FB check no. 129077 for P86,057,646.72
payable to itself and drawn on its deposit with BPI FB SFDM branch.
But upon presentation for payment on September 13, 1989, BPI FB
dishonored the check as it was "drawn against insufficient funds"
(DAIF).

BPI FB then filed a motion for reconsideration but was denied by the Court of
Appeals.

Consequently, FMIC filed with the Regional Trial Court, Branch 146,
Makati City Civil Case No. 89-5280 against BPI FB. FMIC likewise
caused the filing by the Office of the State Prosecutors of an
Information for estafa against Ong, de Asis, Sebastian and four others.
However, the Information was dismissed on the basis of a demurrer to
evidence filed by the accused.
On October 1, 1993, the trial court rendered its Decision in Civil Case
No. 89-5280, the dispositive portion of which reads:
"Premises considered, judgment is rendered in favor of
plaintiff, ordering defendant to pay:
a. the amount of P80 million with interest at the legal
rate from the time this complaint was filed less
P14,667,678.01;
b. the amount of
attorneys fees; and

P100,000.00

as

reasonable

SO ORDERED."

In the instant petition, BPI FB ascribes to the Appellate Court the following
assignments of error:
"A. IN VALIDATING A CLEARLY ILLEGAL AND VOID AGREEMENT
BETWEEN FMIC AND AN OVERSTEPPING BRANCH MANAGER OF
BPI FB, THE COURT OF APPEALS DECIDED THE APPEALED
CASE IN A MANNER NOT IN ACCORDANCE WITH LAW OR THE
APPLICAPLE DECISIONS OF THE HONORABLE COURT.
B. THE COURT OF APPEALS TOTALLY IGNORED THE JUDICIAL
ADMISSIONS MADE BY FMIC WHEN IT CHARACTERIZED THE
TRANSACTION BETWEEN FMIC AND BPI FB AS A TIME DEPOSIT
WHEN IN FACT IT WAS AN INTEREST-BEARING CURRENT
ACCOUNT WHICH, UNDER THE EXISTING BANK REGULATIONS,
WAS AN ILLEGAL TRANSACTION.
C. THE COURT OF APPEALS COMMITTED AN EGREGIOUS
ERROR IN RULING THAT BPI FB CLOTHED ITS BRANCH
MANAGER WITH APPARENT AUTHORITY TO ENTER INTO SUCH
A PATENTLY ILLEGAL ARRANGEMENT.
D. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR
WHEN IT REFUSED TO CONSIDER THE NEGLIGENT ACTS
COMMITTED BY FMIC ITSELF WHICH LED TO THE TRANSFER OF
THE P80 MILLION FROM THE FMIC ACCOUNT TO THE
TEVESTECO ACCOUNT.

c. the cost.
SO ORDERED."
On appeal by both parties, the Court of Appeals rendered a Decision affirming
the assailed Decision with modification, thus:
"WHEREFORE, considering all the foregoing, this Court hereby
modifies the decision of the trial court and adjudges BPI Family Bank
liable to First Metro Investment Corporation for the amount of
P65,332,321.99 plus interest at 17% per annum from August 29, 1989

E. THE COURT OF APPEALS DID NOT ADHERE TO SETTLED

JURISPRUDENCE WHEN IT ADJUDGED BPI FB LIABLE TO FMIC
FOR AN AMOUNT WHICH WAS MORE THAN WHAT WAS
CONTEMPLATED OR PRAYED FOR IN FMICS COMPLAINT,
MOTION FOR RECONSIDERATION OF THE TRIAL COURTS
DECISION AND APPEAL BRIEF.
F. IN SUPPORT OF ITS ALTERNATIVE PRAYER, PETITIONER
SUBMITS THAT THE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR IN NOT ORDERING THE CONSOLIDATION

OF THE INSTANT CASE WITH THE TEVESTECO CASE WHICH IS

STILL PENDING BEFORE THE MAKATI REGIONAL TRIAL COURT."

On another tack, petitioners argument that Central Bank regulations prohibit

demand deposit from earning interest is bereft of merit.

Petitioner BPI FB contends that the Court of Appeals erred in awarding the
17% per annum interest corresponding to the amount deposited by respondent
FMIC. Petitioner insists that respondents deposit is not a special savings
account similar to a time deposit, but actually a demand deposit, withdrawable
upon demand, proscribed from earning interest under Central Bank Circular
777. Petitioner further contends that the transaction is not valid as its Branch
Manager, Jaime Sebastian, clearly overstepped his authority in entering into
such an agreement with respondents Executive Vice President.

Under Central Bank Circular No. 22, Series of 1994, "demand deposits shall
not be subject to any interest rate ceiling." This, in effect, is an open
authority to pay interest on demand deposits, such interest not being subject to
any rate ceiling.

We hold that the parties did not intend the deposit to be treated as a demand
deposit but rather as an interest-earning time deposit not withdrawable any
time. This is quite obvious from the communications between Jaime Sebastian,
petitioners Branch Manager, and Antonio Ong, respondents Executive Vice
President. Both agreed that the deposit of P100 million was non-withdrawable
for one year upon payment in advance of the 17% per annum interest.
Respondents time deposit of P100 million was accepted by petitioner as
shown by a deposit slip prepared and signed by Ong himself who indicated
therein the account number to which the deposit is to be credited, the name of
FMIC as depositor or account holder, the date of deposit, and the amount of
P100 million as deposit in check. Clearly, when respondent FMIC invested its
money with petitioner BPI FB, they intended the P100 million as a time deposit,
to earn 17% per annum interest and to remain intact until its maturity date one
year thereafter.
Ordinarily, a time deposit is defined as "one the payment of which cannot
3
legally be required within such a specified number of days."
In contrast, demand deposits are "all those liabilities of the Bangko Sentral
and of other banks which are denominated in Philippine currency and are
subject to payment in legal tender upon demand by the presentation of
4
(depositors) checks."
While it may be true that barely one month and seven days from the date of
deposit, respondent FMIC demanded the withdrawal of P86,057,646.72
through the issuance of a check payable to itself, the same was made as a
result of the fraudulent and unauthorized transfer by petitioner BPI FB of its
P80 million deposit to Tevestecos savings account. Certainly, such was a
normal reaction of respondent as a depositor to petitioners failure in its
fiduciary duty to treat its account with the highest degree of care.
Under this circumstance, the withdrawal of deposit by respondent FMIC before
the one-year maturity date did not change the nature of its time deposit to one
of demand deposit.

Likewise, time deposits are not subject to interest rate ceiling. In fact, the rate
ceiling was abolished and even allowed to float depending on the market
conditions. Sections 1244 and 1244.1 of the Manual of Regulations of the
Central Bank of the Philippines provide:
"Sec. 1244. Interest on time deposit. Time deposits shall not be subject
to any interest rate ceiling.
Sec. 1244.1. Time of payment. Interest on time deposit may be paid at
maturity or upon withdrawal or in advance. Provided, however, That
interest paid in advance shall not exceed the interest for one year."
Thus, even assuming that respondents account with petitioner is a demand
deposit, still it would earn interest.
Going back to the unauthorized transfer of respondents funds to Tevesteco, in
its attempt to evade any liability therefor, petitioner now impugns the validity of
the subject agreement on the ground that its Branch Manager, Jaime
Sebastian, overstepped the limits of his authority in accepting respondents
deposit with 17% interest per annum. We have held that if a corporation
knowingly permits its officer, or any other agent, to perform acts within the
scope of an apparent authority, holding him out to the public as possessing
power to do those acts, the corporation will, as against any person who has
dealt in good faith with the corporation through such agent, be estopped from
5
denying such authority. We reiterated this doctrine in Prudential Bank vs.
6
Court of Appeals, thus:
"A bank holding out its officers and agent as worthy of confidence will
not be permitted to profit by the frauds they may thus be enabled to
perpetrate in the apparent scope of their employment; nor will it be
permitted to shirk its responsibility for such frauds, even though no
benefit may accrue to the bank therefrom. Accordingly, a banking
corporation is liable to innocent third persons where the representation
is made in the course of its business by an agent acting within the
general scope of his authority even though the agent is secretly
abusing his authority and attempting to perpetrate a fraud upon his
principal or some other person for his own ultimate benefit."

In Francisco vs. Government Service Insurance System, we ruled:

"Corporate transactions would speedily come to a standstill were every
person dealing with a corporation held duty-bound to disbelieve every
act of its responsible officers, no matter how regular they should
appear on their face. This Court has observed in Ramirez vs.
Orientalist Co., 38 Phil. 634, 654-655, that
In passing upon the liability of a corporation in cases of this
kind it is always well to keep in mind the situation as it
presents itself to the third party with whom the contract is
made. Naturally he can have little or no information as to what
occurs in corporate meetings; and he must necessarily rely
upon the external manifestations of corporate consent. The
integrity of commercial transactions can only be maintained by
holding the corporation strictly to the liability fixed upon it by its
agents in accordance with law; and we would be sorry to
announce a doctrine which would permit the property of a man
in the city of Paris to be whisked out of his hands and carried
into a remote quarter of the earth without recourse against the
corporation whose name and authority had been used in the
manner disclosed in this case. As already observed, it is
familiar doctrine that if a corporation knowingly permits one of
its officers, or any other agent, to do acts within the scope of
an apparent authority, and thus holds him out to the public as
possessing power to do those acts, the corporation will, as
against any one who has in good faith dealt with the
corporation through such agent, be estopped from denying his
authority; and where it is said if the corporation permits, this
means the same as if the thing is permitted by the directing
power of the corporation."
Petitioner maintains that respondent should have first inquired whether the
deposit of P100 Million and the fixing of the interest rate were pursuant to its
(petitioners) internal procedures. Petitioners stance is a futile attempt to evade
an obligation clearly established by the intent of the parties. What transpires in
the corporate board room is entirely an internal matter. Hence, petitioner may
not impute negligence on the part of respondents representative in failing to
find out the scope of authority of petitioners Branch Manager. Indeed, the
public has the right to rely on the trustworthiness of bank managers and their
acts. Obviously, confidence in the banking system, which necessarily includes
reliance on bank managers, is vital in the economic life of our society.
Significantly, the transaction was actually acknowledged and ratified by
petitioner when it paid respondent in advance the interest for one year. Thus,
petitioner is estopped from denying that it authorized its Branch Manager to

enter into an agreement with respondents Executive Vice President

concerning the deposit with the corresponding 17% interest per annum.
Anent the award of interest, petitioner contends that such award is not in order
as it had not been prayed for by respondent in its complaint nor was it an issue
agreed upon by the parties during the pre-trial of the case. Nonetheless, the
rule is well settled that when the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing, as in this case.
Furthermore, the interest due shall itself earn legal interest from the time
8
it is judicially demanded. Besides, the matter of how much interest
respondent is entitled to falls squarely within the issues framed by the parties
in their respective pleadings filed with the court a quo. At any rate, courts may
indeed grant the relief warranted by the allegations and proof even if no such
specific relief is prayed for if only to conclude a complete and thorough
9
resolution of the issues involved.
Finally, petitioner faults the Court of Appeals in not ordering the consolidation
of Civil Case No. 89-4996 (filed by petitioner against Tevesteco) with Civil
Case No. 89-5280 (the instant case). According to petitioner, had there been
consolidation of these two cases, it would have been shown that the P80
Million transferred to Tevestecos account were proceeds of a loan extended
by respondent FMIC to Tevesteco. Suffice it to state that as found by both the
trial court and the Appellate Court, petitioners transfer of respondents P80M
to Tevesteco was unauthorized and tainted with fraud.
At this point, we must emphasize that this Court is not a trier of facts. Thus, we
uphold the finding of both lower courts that petitioner failed to exercise that
degree of diligence required by the nature of its obligations to its depositors. A
bank is under obligation to treat the accounts of its depositors with meticulous
care, whether such account consists only of a few hundred pesos or of million
10
of pesos. Here, petitioner cannot claim it exercised such a degree of care
required of it and must, therefore, bear the consequence.
WHEREFORE, the petition is DENIED. The assailed Decision dated July 4,
1997 and the Resolution dated January 28, 1998 of the Court of Appeals in
CA-G.R. CV No. 44986 are hereby AFFIRMED. Costs against petitioner.
SO ORDERED.
Vitug, Corona, and Carpio-Morales, JJ., concur.

G.R. No. 121466

August 15, 1997

PMI COLLEGES, petitioner,

vs.
THE NATIONAL LABOR RELATIONS COMMISSION and ALEJANDRO GA
LVA N, respondents.
ROMERO, J.:
Subject of the instant petition for certiorari under Rule 65 of the Rules of Court
1
2
is the resolution of public respondent National Labor Relations Commission
3
rendered on August 4, 1995, affirming in toto the December 7, 1994 decision
of Labor Arbiter Pablo C. Espiritu declaring petitioner PMI Colleges liable to
pay private respondent Alejandro Galvan P405,000.00 in unpaid wages and
P40,532.00 as attorney's fees.
A chronicle of the pertinent events on record leading to the filing of the instant
petition is as follows:
On July 7, 1991, petitioner, an educational institution offering courses on basic
seaman's training and other marine-related courses, hired private respondent
as contractual instructor with an agreement that the latter shall be paid at an
hourly rate of P30.00 to P50.00, depending on the description of load subjects
and on the schedule for teaching the same. Pursuant to this engagement,
private respondent then organized classes in marine engineering.
Initially, private respondent and other instructors were compensated for
services rendered during the first three periods of the abovementioned
contract. However, for reasons unknown to private respondent, he stopped
receiving payment for the succeeding rendition of services. This claim of nonpayment was embodied in a letter dated March 3, 1992, written by petitioner's
Acting Director, Casimiro A. Aguinaldo, addressed to its President, Atty.
Santiago Pastor, calling attention to and appealing for the early approval and
release of the salaries of its instructors including that of private respondent. It
appeared further in said letter that the salary of private respondent
corresponding to the shipyard and plant visits and the ongoing on-the-job
training of Class 41 on board MV "Sweet Glory" of Sweet Lines, Inc. was not
yet included. This request of the Acting Director apparently went unheeded.
Repeated demands having likewise failed, private respondent was soon
4
constrained to file a complaint before the National Capital Region Arbitration
Branch on September 14, 1993 seeking payment for salaries earned from the
following: (1) basic seaman course Classes 41 and 42 for the period covering
October 1991 to September 1992; (2) shipyard and plant visits and on-the-job
training of Classes 41 and 42 for the period covering October 1991 to
September 1992 on board M/V "Sweet Glory" vessel; and (3) as Acting
Director of Seaman Training Course for 3-1/2 months.

In support of the abovementioned claims, private respondent submitted

documentary evidence which were annexed to his complaint, such as the
detailed load and schedule of classes with number of class hours and rate per
hour (Annex "A"); PMI Colleges Basic Seaman Training Course (Annex "B");
the aforementioned letter-request for payment of salaries by the Acting Director
of PMI Colleges (Annex "C"); unpaid load of private respondent (Annex "D");
and vouchers prepared by the accounting department of petitioner but whose
amounts indicated therein were actually never paid to private respondent
(Exhibit "E").
Private respondent's claims, as expected, were resisted by petitioner. It alleged
that classes in the courses offered which complainant claimed to have
remained unpaid were not held or conducted in the school premises of PMI
Colleges. Only private respondent, it was argued, knew whether classes were
indeed conducted. In the same vein, petitioner maintained that it exercised no
appropriate and proper supervision of the said classes which activities
allegedly violated certain rules and regulations of the Department of Education,
Culture and Sports (DECS). Furthermore, the claims, according to petitioner,
were all exaggerated and that, at any rate, private respondent abandoned his
work at the time he should have commenced the same.
In reply, private respondent belied petitioner's allegations contending, among
others, that he conducted lectures within the premises of petitioner's rented
space located at 5th Floor, Manufacturers Bldg., Sta. Cruz, Manila; that his
students duly enrolled with the Registrar's Office of petitioner; that shipyard
and plant visits were conducted at Fort San Felipe, Cavite Naval Base; that
petitioner was fully aware of said shipyard and plant visits because it even
wrote a letter for that purpose; and that basic seaman courses 41 and 42 were
sanctioned by the DECS as shown by the records of the Registrar's Office.
Later in the proceedings below, petitioner manifested that Mr. Tomas G.
5
Cloma, Jr., a member of the petitioner's Board of Trustees wrote a letter to
the Chairman of the Board on May 23, 1994, clarifying the case of private
respondent and stating therein, inter alia, that under petitioner's by-laws only
the Chairman is authorized to sign any contract and that private respondent, in
any event, failed to submit documents on the alleged shipyard and plant visits
in Cavite Naval Base.
Attempts at amicable settlement having failed, the parties were required to
submit their respective position papers. Thereafter, on June 16, 1994, the
Labor Arbiter issued an order declaring the case submitted for decision on the
basis of the position papers which the parties filed. Petitioner, however,
vigorously opposed this order insisting that there should be a formal trial on the
merits in view of the important factual issues raised. In another order dated
July 22, 1994, the Labor Arbiter impliedly denied petitioner's opposition,
reiterating that the case was already submitted for decision. Hence, a decision
was subsequently rendered by the Labor Arbiter on December 7, 1994 finding

for the private respondent. On appeal, the NLRC affirmed the same in toto in
its decision of August 4, 1995.

issue of jurisdiction and grave abuse of discretion. . . . (Emphasis

supplied).

Aggrieved, petitioner now pleads for the Court to resolve the following issues in
its favor, to wit:

Of the same tenor was our disquisition in Ilocos Sur Electric Cooperative, Inc.
7
v. NLRC where we made plain that:

I. Whether the money claims of private respondent representing

salaries/wages as contractual instructor for class instruction, on-the-job
training and shipboard and plant visits have valid legal and factual
bases;

In certiorari proceedings under Rule 65 of the Rules of Court, judicial

review by this Court does not go so far as to evaluate the sufficiency of
evidence upon which the Labor Arbiter and the NLRC based their
determinations, the inquiry being limited essentially to whether or not
said public respondents had acted without or in excess of its
jurisdiction or with grave abuse of discretion. (Emphasis supplied).

II. Whether claims for salaries/wages for services relative to on-the-job

training and shipboard and plant visits by instructors, assuming the
same were really conducted, have valid bases;
III. Whether the petitioner was denied its right to procedural due
process; and
IV. Whether the NLRC findings in its questioned resolution have sound
legal and factual support.
We see no compelling reason to grant petitioner's plea; the same must,
therefore, be dismissed.
At once, a mere perusal of the issues raised by petitioner already invites
dismissal for demonstrated ignorance and disregard of settled rules on
certiorari. Except perhaps for the third issue, the rest glaringly call for a reexamination, evaluation and appreciation of the weight and sufficiency of
factual evidence presented before the Labor Arbiter. This, of course, the Court
cannot do in the exercise of its certiorari jurisdiction without transgressing the
well-defined limits thereof. The corrective power of the Court in this regard is
confined only to jurisdictional issues and a determination of whether there is
such grave abuse of discretion amounting to lack or excess of jurisdiction on
the part of a tribunal or agency. So unyielding and consistent are the decisional
rules thereon that it is indeed surprising why petitioner's counsel failed to
accord them the observance they deserve.
Thus, in San Miguel Foods, Inc. Cebu B-Men Feed Plant v. Hon. Bienvenido
6
Laguesma, we were emphatic in declaring that:
This Court is definitely not the proper venue to consider this matter for
it is not a trier of facts. . . . Certiorari is a remedy narrow in its scope
and inflexible in character. It is not a general utility tool in the legal
workshop. Factual issues are not a proper subject for certiorari, as the
power of the Supreme Court to review labor cases is limited to the

To be sure, this does not mean that the Court would disregard altogether the
evidence presented. We merely declare that the extent of review of evidence
we ordinarily provide in other cases is different when it is a special civil action
of certiorari. The latter commands us to merely determine whether there is
basis established on record to support the findings of a tribunal and such
findings meet the required quantum of proof, which in this instance, is
substantial evidence. Our deference to the expertise acquired by quasi-judicial
agencies and the limited scope granted to us in the exercise of certiorari
jurisdiction restrain us from going so far as to probe into the correctness of a
tribunal's evaluation of evidence, unless there is palpable mistake and
complete disregard thereof in which case certiorari would be proper. In plain
terms, in certiorari proceedings, we are concerned with mere "errors of
jurisdiction" and not "errors of judgment." Thus:
The rule is settled that the original and exclusive jurisdiction of this
Court to review a decision of respondent NLRC (or Executive Labor
Arbiter as in this case) in a petition for certiorari under Rule 65 does
not normally include an inquiry into the correctness of its evaluation of
the evidence. Errors of judgment, as distinguished from errors of
jurisdiction, are not within the province of a special civil action for
certiorari, which is merely confined to issues of jurisdiction or grave
abuse of discretion. It is thus incumbent upon petitioner to satisfactorily
establish that respondent Commission or executive labor arbiter acted
capriciously and whimsically in total disregard of evidence material to
or even decisive of the controversy, in order that the extraordinary writ
of certiorari will lie. By grave abuse of discretion is meant such
capricious and whimsical exercise of judgment as is equivalent to lack
of jurisdiction, and it must be shown that the discretion was exercised
arbitrarily or despotically. For certiorari to lie there must be capricious,
arbitrary and whimsical exercise of power, the very antithesis of the
judicial prerogative in accordance with centuries of both civil law and
8
common law traditions.

The Court entertains no doubt that the foregoing doctrines apply with equal
force in the case at bar.
In any event, granting that we may have to delve into the facts and evidence of
the parties, we still find no puissant justification for us to adjudge both the
Labor Arbiter's and NLRC's appreciation of such evidence as indicative of any
grave abuse of discretion.
First. Petitioner places so much emphasis on its argument that private
respondent did not produce a copy of the contract pursuant to which he
rendered services. This argument is, of course, puerile. The absence of such
copy does not in any manner negate the existence of a contract of employment
since "(C)ontracts shall be obligatory, in whatever form they have
been entered into, provided all the essential requisites for their validity are
9
present." The only exception to this rule is "when the law requires that a
contract be in some form in order that it may be valid or enforceable, or that a
contract be proved in a certain way." However, there is no requirement under
the law that the contract of employment of the kind entered into by petitioner
with private respondent should be in any particular form. While it may have
been desirable for private respondent to have produced a copy of his contract
if one really exists, but the absence thereof, in any case, does not militate
against his claims inasmuch as:
No particular form of evidence is required to prove the existence of an
employer-employee relationship. Any competent and relevant
evidence to prove the relationship may be admitted. For, if only
documentary evidence would be required to show that relationship, no
scheming employer would ever be brought before the bar of justice, as
no employer would wish to come out with any trace of the illegality he
has authored considering that it should take much weightier proof to
10
invalidate a written instrument. . . .
At any rate, the vouchers prepared by petitioner's own accounting department
and the letter-request of its Acting Director asking for payment of private
respondent's services suffice to support a reasonable conclusion that private
respondent was employed with petitioner. How else could one explain the fact
that private respondent was supposed to be paid the amounts mentioned in
those documents if he were not employed? Petitioner's evidence is wanting in
this respect while private respondent affirmatively stated that the same arose
out of his employment with petitioner. As between the two, the latter is
weightier inasmuch as we accord affirmative testimony greater value than a
negative one. For the foregoing reasons, we find it difficult to agree with
petitioner's assertion that the absence of a copy of the alleged contract should
nullify private respondent's claims.
Neither can we concede that such contract would be invalid just because the
signatory thereon was not the Chairman of the Board which allegedly violated

petitioner's by-laws. Since by-laws operate merely as internal rules among the
stockholders, they cannot affect or prejudice third persons who deal with the
11
corporation, unless they have knowledge of the same." No proof appears on
record that private respondent ever knew anything about the provisions of said
by-laws. In fact, petitioner itself merely asserts the same without even
bothering to attach a copy or excerpt thereof to show that there is such a
provision. How can it now expect the Labor Arbiter and the NLRC to believe it?
That this allegation has never been denied by private respondent does not
necessarily signify admission of its existence because technicalities of law and
procedure and the rules obtaining in the courts of law do not strictly apply to
proceedings of this nature.
Second. Petitioner bewails the fact that both the Labor Arbiter and the NLRC
accorded due weight to the documents prepared by private respondent since
they are said to be self-serving. "Self-serving evidence" is not to be literally
12
taken as evidence that serves one's selfish interest. The fact alone that most
of the documents submitted in evidence by private respondent were prepared
by him does not make them self-serving since they have been offered in the
proceedings before the Labor Arbiter and that ample opportunity was given to
petitioner to rebut their veracity and authenticity. Petitioner, however, opted to
merely deny them which denial, ironically, is actually what is considered self13
serving evidence and, therefore, deserves scant consideration. In any event,
any denial made by petitioner cannot stand against the affirmative and fairly
detailed manner by which private respondent supported his claims, such as the
places where he conducted his classes, on-the-job training and shipyard and
plant visits; the rate he applied and the duration of said rendition of services;
the fact that he was indeed engaged as a contractual instructor by petitioner;
and that part of his services was not yet remunerated. These evidence, to
reiterate, have never been effectively refuted by petitioner.
Third. As regards the amounts demanded by private respondent, we can only
rely upon the evidence presented which, in this case, consists of the
computation of private respondent, as well as the findings of both the Labor
Arbiter and the NLRC. Petitioner, it must be stressed, presented no satisfactory
proof to the contrary. Absent such proof, we are constrained to rely upon
private respondent's otherwise straightforward explanation of his claims.
Fourth. The absence of a formal hearing or trial before the Labor Arbiter is no
cause for petitioner to impute grave abuse of discretion. Whether to conduct
one or not depends on the sole discretion of the Labor Arbiter, taking into
account the position papers and supporting documents submitted by the
parties on every issue presented. If the Labor Arbiter, in his judgment, is
confident that he can rely on the documents before him, he cannot be faulted
for not conducting a formal trial anymore, unless it would appear that, in view
of the particular circumstances of a case, the documents, without more, are
really insufficient.

As applied to the instant case, we can understand why the Labor Arbiter has
opted not to proceed to trial, considering that private respondent, through
annexes to his position paper, has adequately established that, first of all, he
was an employee of petitioner; second, the nature and character of his
services, and finally, the amounts due him in consideration of his services.
Petitioner, it should be reiterated, failed to controvert them. Actually, it offered
only four documents later in the course of the proceedings. It has only itself to
blame if it did not attach its supporting evidence with its position paper. It
cannot now insist that there be a trial to give it an opportunity to ventilate what
it should have done earlier. Section 3, Rule V of the New Rules of Procedure of
the NLRC is very clear on the matter:
Sec. 3. . . .
These verified position papers . . . shall be accompanied by all
supporting documents including the affidavits of their respective
witnesses which shall take the place of the latter's direct testimony.
The parties shall thereafter not be allowed to allege facts, or present
evidence to prove facts, not referred to and any cause or causes of
action not included in the complaint or position papers, affidavits and
other documents. . . . (Emphasis supplied).
Thus, given the mandate of said rule, petitioner should have foreseen that the
Labor Arbiter, in view of the non-litigious nature of the proceedings before it,
might not proceed at all to trial. Petitioner cannot now be heard to complain of
lack of due process. The following is apropos:
The petitioners should not have assumed that after they submitted
their position papers, the Labor Arbiter would call for a formal trial or
hearing. The holding of a trial is discretionary on the Labor Arbiter, it is
not a matter of right of the parties, especially in this case, where the
private respondents had already presented their documentary
evidence.
xxx xxx xxx
The petitioners did ask in their position paper for a hearing to thresh
out some factual matters pertinent to their case. However, they had no
right or reason to assume that their request would be granted. The
petitioners should have attached to their position paper all the
documents that would prove their claim in case it was decided that no
hearing should be conducted or was necessary. In fact, the rules
require that position papers shall be accompanied by all supporting
documents, including affidavits of witnesses in lieu of their direct
14
testimony.

It must be noted that adequate opportunity was given to petitioner in the

presentation of its evidence, such as when the Labor Arbiter granted
15
petitioner's Manifestation and Motion
dated July 22, 1994 allowing it to
submit four more documents. This opportunity notwithstanding, petitioner still
failed to fully proffer all its evidence which might help the Labor Arbiter in
16
resolving the issues. What it desired instead, as stated in its petition, was to
"require presentation of witnesses buttressed by relevant documents in support
thereof." But this is precisely the opportunity given to petitioner when the Labor
Arbiter granted its Motion and Manifestation. It should have presented the
documents it was proposing to submit. The affidavits of its witnesses would
17
have sufficed in lieu of their direct testimony to clarify what it perceives to be
complex factual issues. We rule that the Labor Arbiter and the NLRC were not
remiss in their duty to afford petitioner due process. The essence of due
process is merely that a party be afforded a reasonable opportunity to be heard
18
and to submit any evidence he may have in support of his defense.
WHEREFORE, in view of the foregoing, the instant petition is hereby
DISMISSED for lack of merit while the resolution of the National Labor
Relations Commission dated August 4, 1995 is hereby AFFIRMED.
SO ORDERED.
Regalado, Puno and Mendoza, JJ., concur.
Torres, Jr., J., is on Leave.

G.R. No. 152392

May 26, 2005

Finally, KAL submitted on March 6, 2000 an Affidavit of even date, executed

by its general manager Suk Kyoo Kim, alleging that the board of directors
conducted a special teleconference on June 25, 1999, which he and Atty.
Aguinaldo attended. It was also averred that in that same teleconference, the
board of directors approved a resolution authorizing Atty. Aguinaldo to execute
the certificate of non-forum shopping and to file the complaint. Suk Kyoo Kim
also alleged, however, that the corporation had no written copy of the aforesaid
resolution.

EXPERTRAVEL & TOURS, INC., petitioner,

vs.
COURT OF APPEALS and KOREAN AIRLINES, respondent.
DECISION
CALLEJO, SR., J.:

Before us is a petition for review on certiorari of the Decision of the Court of

Appeals (CA) in CA-G.R. SP No. 61000 dismissing the petition for certiorari
and mandamus filed by Expertravel and Tours, Inc. (ETI).
The Antecedents
Korean Airlines (KAL) is a corporation established and registered in the
Republic of South Korea and licensed to do business in the Philippines. Its
general manager in the Philippines is Suk Kyoo Kim, while its appointed
counsel was Atty. Mario Aguinaldo and his law firm.
2

On September 6, 1999, KAL, through Atty. Aguinaldo, filed a Complaint

against ETI with the Regional Trial Court (RTC) of Manila, for the collection of
the principal amount of P260,150.00, plus attorneys fees and exemplary
damages. The verification and certification against forum shopping was signed
by Atty. Aguinaldo, who indicated therein that he was the resident agent and
legal counsel of KAL and had caused the preparation of the complaint.
ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo
was not authorized to execute the verification and certificate of non-forum
shopping as required by Section 5, Rule 7 of the Rules of Court. KAL opposed
the motion, contending that Atty. Aguinaldo was its resident agent and was
registered as such with the Securities and Exchange Commission (SEC) as
required by the Corporation Code of the Philippines. It was further alleged that
Atty. Aguinaldo was also the corporate secretary of KAL. Appended to the said
opposition was the identification card of Atty. Aguinaldo, showing that he was
the lawyer of KAL.
During the hearing of January 28, 2000, Atty. Aguinaldo claimed that he had
been authorized to file the complaint through a resolution of the KAL Board of
Directors approved during a special meeting held on June 25, 1999. Upon his
motion, KAL was given a period of 10 days within which to submit a copy of the
said resolution. The trial court granted the motion. Atty. Aguinaldo
subsequently filed other similar motions, which the trial court granted.

On April 12, 2000, the trial court issued an Order denying the motion to
dismiss, giving credence to the claims of Atty. Aguinaldo and Suk Kyoo Kim
that the KAL Board of Directors indeed conducted a teleconference on June
25, 1999, during which it approved a resolution as quoted in the submitted
affidavit.
ETI filed a motion for the reconsideration of the Order, contending that it was
inappropriate for the court to take judicial notice of the said teleconference
5
without any prior hearing. The trial court denied the motion in its Order dated
August 8, 2000.
ETI then filed a petition for certiorari and mandamus, assailing the orders of the
RTC. In its comment on the petition, KAL appended a certificate signed by
Atty. Aguinaldo dated January 10, 2000, worded as follows:
SECRETARYS/RESIDENT AGENTS CERTIFICATE
KNOW ALL MEN BY THESE PRESENTS:
I, Mario A. Aguinaldo, of legal age, Filipino, and duly elected and
appointed Corporate Secretary and Resident Agent of KOREAN
AIRLINES, a foreign corporation duly organized and existing under
and by virtue of the laws of the Republic of Korea and also duly
registered and authorized to do business in the Philippines, with office
address at Ground Floor, LPL Plaza Building, 124 Alfaro St., Salcedo
Village, Makati City, HEREBY CERTIFY that during a special meeting
of the Board of Directors of the Corporation held on June 25, 1999 at
which a quorum was present, the said Board unanimously passed,
voted upon and approved the following resolution which is now in full
force and effect, to wit:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A.
Aguinaldo & Associates or any of its lawyers are hereby
appointed and authorized to take with whatever legal action
necessary to effect the collection of the unpaid account of
Expert Travel & Tours. They are hereby specifically authorized
to prosecute, litigate, defend, sign and execute any document

or paper necessary to the filing and prosecution of said claim

in Court, attend the Pre-Trial Proceedings and enter into a
compromise agreement relative to the above-mentioned claim.
IN WITNESS WHEREOF, I have hereunto affixed my signature this
th
10 day of January, 1999, in the City of Manila, Philippines.
(Sgd.)
MARIO A. AGUINALDO
Resident Agent
th

SUBSCRIBED AND SWORN to before me this 10 day of January,

1999, Atty. Mario A. Aguinaldo exhibiting to me his Community Tax
Certificate No. 14914545, issued on January 7, 2000 at Manila,
Philippines.
Doc. No. 1005;
Page No. 198;
Book No. XXI
Series of 1999.

(Sgd.)
ATTY. HENRY D. ADASA
Notary Public
Until December 31, 2000
PTR No. 320501 Mla.
13
1/4/99

On December 18, 2001, the CA rendered judgment dismissing the petition,

ruling that the verification and certificate of non-forum shopping executed by
Atty. Aguinaldo was sufficient compliance with the Rules of Court. According to
the appellate court, Atty. Aguinaldo had been duly authorized by the board
resolution approved on June 25, 1999, and was the resident agent of KAL. As
such, the RTC could not be faulted for taking judicial notice of the said
teleconference of the KAL Board of Directors.
ETI filed a motion for reconsideration of the said decision, which the CA
denied. Thus, ETI, now the petitioner, comes to the Court by way of petition for
review on certiorari and raises the following issue:
DID PUBLIC RESPONDENT COURT OF APPEALS DEPART FROM
THE ACCEPTED AND USUAL COURSE OF JUDICIAL
PROCEEDINGS WHEN IT RENDERED ITS QUESTIONED
DECISION AND WHEN IT ISSUED ITS QUESTIONED
7
RESOLUTION, ANNEXES A AND B OF THE INSTANT PETITION?

The petitioner asserts that compliance with Section 5, Rule 7, of the Rules of
Court can be determined only from the contents of the complaint and not by
documents or pleadings outside thereof. Hence, the trial court committed grave
abuse of discretion amounting to excess of jurisdiction, and the CA erred in
considering the affidavit of the respondents general manager, as well as the
Secretarys/Resident Agents Certification and the resolution of the board of
directors contained therein, as proof of compliance with the requirements of
Section 5, Rule 7 of the Rules of Court. The petitioner also maintains that the
RTC cannot take judicial notice of the said teleconference without prior
hearing, nor any motion therefor. The petitioner reiterates its submission that
the teleconference and the resolution adverted to by the respondent was a
mere fabrication.
The respondent, for its part, avers that the issue of whether modern technology
is used in the field of business is a factual issue; hence, cannot be raised in a
petition for review on certiorari under Rule 45 of the Rules of Court. On the
merits of the petition, it insists that Atty. Aguinaldo, as the resident agent and
corporate secretary, is authorized to sign and execute the certificate of nonforum shopping required by Section 5, Rule 7 of the Rules of Court, on top of
the board resolution approved during the teleconference of June 25, 1999. The
respondent insists that "technological advances in this time and age are as
commonplace as daybreak." Hence, the courts may take judicial notice that the
Philippine Long Distance Telephone Company, Inc. had provided a record of
corporate conferences and meetings through FiberNet using fiber-optic
transmission technology, and that such technology facilitates voice and image
transmission with ease; this makes constant communication between a
foreign-based office and its Philippine-based branches faster and easier,
allowing for cost-cutting in terms of travel concerns. It points out that even the
E-Commerce Law has recognized this modern technology. The respondent
posits that the courts are aware of this development in technology; hence, may
take judicial notice thereof without need of hearings. Even if such hearing is
required, the requirement is nevertheless satisfied if a party is allowed to file
pleadings by way of comment or opposition thereto.
In its reply, the petitioner pointed out that there are no rulings on the matter of
teleconferencing as a means of conducting meetings of board of directors for
purposes of passing a resolution; until and after teleconferencing is recognized
as a legitimate means of gathering a quorum of board of directors, such cannot
be taken judicial notice of by the court. It asserts that safeguards must first be
set up to prevent any mischief on the public or to protect the general public
from any possible fraud. It further proposes possible amendments to the
Corporation Code to give recognition to such manner of board meetings to
transact business for the corporation, or other related corporate matters; until
then, the petitioner asserts, teleconferencing cannot be the subject of judicial
notice.

The petitioner further avers that the supposed holding of a special meeting on
June 25, 1999 through teleconferencing where Atty. Aguinaldo was supposedly
given such an authority is a farce, considering that there was no mention of
where it was held, whether in this country or elsewhere. It insists that the
Corporation Code requires board resolutions of corporations to be submitted to
the SEC. Even assuming that there was such a teleconference, it would be
against the provisions of the Corporation Code not to have any record thereof.
The petitioner insists that the teleconference and resolution adverted to by the
respondent in its pleadings were mere fabrications foisted by the respondent
and its counsel on the RTC, the CA and this Court.
The petition is meritorious.
Section 5, Rule 7 of the Rules of Court provides:
SEC. 5. Certification against forum shopping. The plaintiff or
principal party shall certify under oath in the complaint or other
initiatory pleading asserting a claim for relief, or in a sworn certification
annexed thereto and simultaneously filed therewith: (a) that he has not
theretofore commenced any action or filed any claim involving the
same issues in any court, tribunal or quasi-judicial agency and, to the
best of his knowledge, no such other action or claim is pending therein;
(b) if there is such other pending action or claim, a complete statement
of the present status thereof; and (c) if he should thereafter learn that
the same or similar action or claim has been filed or is pending, he
shall report that fact within five (5) days therefrom to the court wherein
his aforesaid complaint or initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be curable
by mere amendment of the complaint or other initiatory pleading but
shall be cause for the dismissal of the case without prejudice, unless
otherwise provided, upon motion and after hearing. The submission of
a false certification or non-compliance with any of the undertakings
therein shall constitute indirect contempt of court, without prejudice to
the corresponding administrative and criminal actions. If the acts of the
party or his counsel clearly constitute willful and deliberate forum
shopping, the same shall be ground for summary dismissal with
prejudice and shall constitute direct contempt, as well as a cause for
administrative sanctions.
It is settled that the requirement to file a certificate of non-forum shopping is
8
mandatory and that the failure to comply with this requirement cannot be
excused. The certification is a peculiar and personal responsibility of the party,
an assurance given to the court or other tribunal that there are no other
pending cases involving basically the same parties, issues and causes of

action. Hence, the certification must be accomplished by the party himself

because he has actual knowledge of whether or not he has initiated similar
actions or proceedings in different courts or tribunals. Even his counsel may be
9
unaware of such facts. Hence, the requisite certification executed by the
10
plaintiffs counsel will not suffice.
In a case where the plaintiff is a private corporation, the certification may be
signed, for and on behalf of the said corporation, by a specifically authorized
person, including its retained counsel, who has personal knowledge of the
facts required to be established by the documents. The reason was explained
11
by the Court in National Steel Corporation v. Court of Appeals, as follows:
Unlike natural persons, corporations may perform physical actions only
through properly delegated individuals; namely, its officers and/or
agents.

The corporation, such as the petitioner, has no powers except those

expressly conferred on it by the Corporation Code and those that are
implied by or are incidental to its existence. In turn, a corporation
exercises said powers through its board of directors and/or its dulyauthorized officers and agents. Physical acts, like the signing of
documents, can be performed only by natural persons duly-authorized
for the purpose by corporate by-laws or by specific act of the board of
directors. "All acts within the powers of a corporation may be
performed by agents of its selection; and except so far as limitations or
restrictions which may be imposed by special charter, by-law, or
statutory provisions, the same general principles of law which govern
the relation of agency for a natural person govern the officer or agent
of a corporation, of whatever status or rank, in respect to his power to
act for the corporation; and agents once appointed, or members acting
in their stead, are subject to the same rules, liabilities and incapacities
as are agents of individuals and private persons."

For who else knows of the circumstances required in the Certificate

but its own retained counsel. Its regular officers, like its board
chairman and president, may not even know the details required
therein.
Indeed, the certificate of non-forum shopping may be incorporated in the
complaint or appended thereto as an integral part of the complaint. The rule is
that compliance with the rule after the filing of the complaint, or the dismissal of
a complaint based on its non-compliance with the rule, is impermissible.

However, in exceptional circumstances, the court may allow subsequent

12
compliance with the rule. If the authority of a partys counsel to execute a
certificate of non-forum shopping is disputed by the adverse party, the former
is required to show proof of such authority or representation.
In this case, the petitioner, as the defendant in the RTC, assailed the authority
of Atty. Aguinaldo to execute the requisite verification and certificate of nonforum shopping as the resident agent and counsel of the respondent. It was,
thus, incumbent upon the respondent, as the plaintiff, to allege and establish
that Atty. Aguinaldo had such authority to execute the requisite verification and
certification for and in its behalf. The respondent, however, failed to do so.
The verification and certificate of non-forum shopping which was incorporated
in the complaint and signed by Atty. Aguinaldo reads:
I, Mario A. Aguinaldo of legal age, Filipino, with office address at Suite
210 Gedisco Centre, 1564 A. Mabini cor. P. Gil Sts., Ermita, Manila,
after having sworn to in accordance with law hereby deposes and say:
THAT 1. I am the Resident Agent and Legal Counsel of the plaintiff in the
above entitled case and have caused the preparation of the above
complaint;
2. I have read the complaint and that all the allegations contained
therein are true and correct based on the records on files;
3. I hereby further certify that I have not commenced any other action
or proceeding involving the same issues in the Supreme Court, the
Court of Appeals, or different divisions thereof, or any other tribunal or
agency. If I subsequently learned that a similar action or proceeding
has been filed or is pending before the Supreme Court, the Court of
Appeals, or different divisions thereof, or any tribunal or agency, I will
notify the court, tribunal or agency within five (5) days from such
notice/knowledge.
(Sgd.)
MARIO
Affiant
CITY OF MANILA

A.

AGUINALDO

th

SUBSCRIBED AND SWORN TO before me this 30 day of August,

1999, affiant exhibiting to me his Community Tax Certificate No.
00671047 issued on January 7, 1999 at Manila, Philippines.As

gleaned from the aforequoted certification, there was no allegation that

Atty. Aguinaldo had been authorized to execute the certificate of nonforum shopping by the respondents Board of Directors; moreover, no
such board resolution was appended thereto or incorporated therein.
Doc. No. 1005;
Page No. 198;
Book No. XXI
Series of 1999.

(Sgd.)
ATTY. HENRY D. ADASA
Notary Public
Until December 31, 2000
PTR No. 320501 Mla.
13
1/4/99

While Atty. Aguinaldo is the resident agent of the respondent in the Philippines,
this does not mean that he is authorized to execute the requisite certification
against forum shopping. Under Section 127, in relation to Section 128 of the
Corporation Code, the authority of the resident agent of a foreign corporation
with license to do business in the Philippines is to receive, for and in behalf of
the foreign corporation, services and other legal processes in all actions and
other legal proceedings against such corporation, thus:
SEC. 127. Who may be a resident agent. A resident agent may
either be an individual residing in the Philippines or a domestic
corporation lawfully transacting business in the Philippines: Provided,
That in the case of an individual, he must be of good moral character
and of sound financial standing.
SEC. 128. Resident agent; service of process. The Securities and
Exchange Commission shall require as a condition precedent to the
issuance of the license to transact business in the Philippines by any
foreign corporation that such corporation file with the Securities and
Exchange Commission a written power of attorney designating some
persons who must be a resident of the Philippines, on whom any
summons and other legal processes may be served in all actions or
other legal proceedings against such corporation, and consenting that
service upon such resident agent shall be admitted and held as valid
as if served upon the duly-authorized officers of the foreign corporation
14
as its home office.
Under the law, Atty. Aguinaldo was not specifically authorized to execute a
certificate of non-forum shopping as required by Section 5, Rule 7 of the Rules
of Court. This is because while a resident agent may be aware of actions filed
against his principal (a foreign corporation doing business in the Philippines),

such resident may not be aware of actions initiated by its principal, whether in
the Philippines against a domestic corporation or private individual, or in the
country where such corporation was organized and registered, against a
Philippine registered corporation or a Filipino citizen.
The respondent knew that its counsel, Atty. Aguinaldo, as its resident agent,
was not specifically authorized to execute the said certification. It attempted to
show its compliance with the rule subsequent to the filing of its complaint by
submitting, on March 6, 2000, a resolution purporting to have been approved
by its Board of Directors during a teleconference held on June 25, 1999,
allegedly with Atty. Aguinaldo and Suk Kyoo Kim in attendance. However, such
attempt of the respondent casts veritable doubt not only on its claim that such
a teleconference was held, but also on the approval by the Board of Directors
of the resolution authorizing Atty. Aguinaldo to execute the certificate of nonforum shopping.
In its April 12, 2000 Order, the RTC took judicial notice that because of the
onset of modern technology, persons in one location may confer with other
persons in other places, and, based on the said premise, concluded that Suk
Kyoo Kim and Atty. Aguinaldo had a teleconference with the respondents
Board of Directors in South Korea on June 25, 1999. The CA, likewise, gave
credence to the respondents claim that such a teleconference took place, as
contained in the affidavit of Suk Kyoo Kim, as well as Atty. Aguinaldos
certification.
Generally speaking, matters of judicial notice have three material requisites: (1)
the matter must be one of common and general knowledge; (2) it must be well
and authoritatively settled and not doubtful or uncertain; and (3) it must be
known to be within the limits of the jurisdiction of the court. The principal guide
in determining what facts may be assumed to be judicially known is that of
notoriety. Hence, it can be said that judicial notice is limited to facts evidenced
[15]
by public records and facts of general notoriety.
Moreover, a judicially
noticed fact must be one not subject to a reasonable dispute in that it is either:
(1) generally known within the territorial jurisdiction of the trial court; or (2)
capable of accurate and ready determination by resorting to sources whose
16
accuracy cannot reasonably be questionable.
Things of "common knowledge," of which courts take judicial matters coming to
the knowledge of men generally in the course of the ordinary experiences of
life, or they may be matters which are generally accepted by mankind as true
and are capable of ready and unquestioned demonstration. Thus, facts which
are universally known, and which may be found in encyclopedias, dictionaries
or other publications, are judicially noticed, provided, they are of such universal
notoriety and so generally understood that they may be regarded as forming
part of the common knowledge of every person. As the common knowledge of
man ranges far and wide, a wide variety of particular facts have been judicially
noticed as being matters of common knowledge. But a court cannot take

judicial notice of any fact which, in part, is dependent on the existence or non17
existence of a fact of which the court has no constructive knowledge.
In this age of modern technology, the courts may take judicial notice that
business transactions may be made by individuals through teleconferencing.
Teleconferencing is interactive group communication (three or more people in
two or more locations) through an electronic medium. In general terms,
teleconferencing can bring people together under one roof even though they
18
are separated by hundreds of miles. This type of group communication may
be used in a number of ways, and have three basic types: (1) video
conferencing - television-like communication augmented with sound; (2)
computer conferencing - printed communication through keyboard terminals,
and (3) audio-conferencing-verbal communication via the telephone with
19
optional capacity for telewriting or telecopying.
A teleconference represents a unique alternative to face-to-face (FTF)
meetings. It was first introduced in the 1960s with American Telephone and
Telegraphs Picturephone. At that time, however, no demand existed for the
new technology. Travel costs were reasonable and consumers were unwilling
to pay the monthly service charge for using the picturephone, which was
regarded as more of a novelty than as an actual means for everyday
20
communication.
In time, people found it advantageous to hold
teleconferencing in the course of business and corporate governance, because
of the money saved, among other advantages include:
1. People (including outside guest speakers) who wouldnt normally
attend a distant FTF meeting can participate.
2. Follow-up to earlier meetings can be done with relative ease and
little expense.
3. Socializing is minimal compared to an FTF meeting; therefore,
meetings are shorter and more oriented to the primary purpose of the
meeting.
4. Some routine meetings are more effective since one can audioconference from any location equipped with a telephone.
5. Communication between the home office and field staffs is
maximized.
6. Severe climate and/or unreliable transportation may necessitate
teleconferencing.
7. Participants are generally better prepared than for FTF meetings.

8. It is particularly satisfactory for simple problem-solving, information

exchange, and procedural tasks.
9. Group members participate more equally in well-moderated
21
teleconferences than an FTF meeting.
On the other hand, other private corporations opt not to hold teleconferences
because of the following disadvantages:
1. Technical failures with equipment, including connections that arent
made.
2. Unsatisfactory for complex interpersonal communication, such as
negotiation or bargaining.

Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated
in a teleconference along with the respondents Board of Directors, the Court is
not convinced that one was conducted; even if there had been one, the Court
is not inclined to believe that a board resolution was duly passed specifically
authorizing Atty. Aguinaldo to file the complaint and execute the required
certification against forum shopping.
The records show that the petitioner filed a motion to dismiss the complaint on
the ground that the respondent failed to comply with Section 5, Rule 7 of the
Rules of Court. The respondent opposed the motion on December 1, 1999, on
its contention that Atty. Aguinaldo, its resident agent, was duly authorized to
sue in its behalf. The respondent, however, failed to establish its claim that
Atty. Aguinaldo was its resident agent in the Philippines. Even the identification
25
card of Atty. Aguinaldo which the respondent appended to its pleading merely
showed that he is the company lawyer of the respondents Manila Regional
Office.

3. Impersonal, less easy to create an atmosphere of group rapport.

4. Lack of participant familiarity with the equipment, the medium itself,
and meeting skills.
5. Acoustical problems within the teleconferencing rooms.
6. Difficulty in determining participant speaking order; frequently one
person monopolizes the meeting.
7. Greater participant preparation time needed.
22

8. Informal, one-to-one, social interaction not possible.

Indeed, teleconferencing can only facilitate the linking of people; it does not
alter the complexity of group communication. Although it may be easier to
communicate via teleconferencing, it may also be easier to miscommunicate.
Teleconferencing cannot satisfy the individual needs of every type of
23
meeting.
In the Philippines, teleconferencing and videoconferencing of members of
board of directors of private corporations is a reality, in light of Republic Act No.
8792. The Securities and Exchange Commission issued SEC Memorandum
Circular No. 15, on November 30, 2001, providing the guidelines to be
24
complied with related to such conferences. Thus, the Court agrees with the
RTC that persons in the Philippines may have a teleconference with a group of
persons in South Korea relating to business transactions or corporate
governance.

The respondent, through Atty. Aguinaldo, announced the holding of the

teleconference only during the hearing of January 28, 2000; Atty. Aguinaldo
then prayed for ten days, or until February 8, 2000, within which to submit the
board resolution purportedly authorizing him to file the complaint and execute
the required certification against forum shopping. The court granted the
26
motion. The respondent, however, failed to comply, and instead prayed for 15
more days to submit the said resolution, contending that it was with its main
27
office in Korea. The court granted the motion per its Order dated February
11, 2000. The respondent again prayed for an extension within which to submit
28
the said resolution, until March 6, 2000. It was on the said date that the
respondent submitted an affidavit of its general manager Suk Kyoo Kim,
stating, inter alia, that he and Atty. Aguinaldo attended the said teleconference
on June 25, 1999, where the Board of Directors supposedly approved the
following resolution:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo
& Associates or any of its lawyers are hereby appointed and
authorized to take with whatever legal action necessary to effect the
collection of the unpaid account of Expert Travel & Tours. They are
hereby specifically authorized to prosecute, litigate, defend, sign and
execute any document or paper necessary to the filing and prosecution
of said claim in Court, attend the Pre-trial Proceedings and enter into a
29
compromise agreement relative to the above-mentioned claim.
But then, in the same affidavit, Suk Kyoo Kim declared that the respondent
"do[es] not keep a written copy of the aforesaid Resolution" because no
records of board resolutions approved during teleconferences were kept. This
belied the respondents earlier allegation in its February 10, 2000 motion for
extension of time to submit the questioned resolution that it was in the custody
of its main office in Korea. The respondent gave the trial court the impression

that it needed time to secure a copy of the resolution kept in Korea, only to
allege later (via the affidavit of Suk Kyoo Kim) that it had no such written copy.
Moreover, Suk Kyoo Kim stated in his affidavit that the resolution was
embodied in the Secretarys/Resident Agents Certificate signed by Atty.
Aguinaldo. However, no such resolution was appended to the said certificate.
The respondents allegation that its board of directors conducted a
teleconference on June 25, 1999 and approved the said resolution (with Atty.
Aguinaldo in attendance) is incredible, given the additional fact that no such
allegation was made in the complaint. If the resolution had indeed been
approved on June 25, 1999, long before the complaint was filed, the
respondent should have incorporated it in its complaint, or at least appended a
copy thereof. The respondent failed to do so. It was only on January 28, 2000
that the respondent claimed, for the first time, that there was such a meeting of
the Board of Directors held on June 25, 1999; it even represented to the Court
that a copy of its resolution was with its main office in Korea, only to allege
later that no written copy existed. It was only on March 6, 2000 that the
respondent alleged, for the first time, that the meeting of the Board of Directors
where the resolution was approved was held via teleconference.
Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had
signed a Secretarys/Resident Agents Certificate alleging that the board of
directors held a teleconference on June 25, 1999. No such certificate was
appended to the complaint, which was filed on September 6, 1999. More
importantly, the respondent did not explain why the said certificate was signed
by Atty. Aguinaldo as early as January 9, 1999, and yet was notarized one
year later (on January 10, 2000); it also did not explain its failure to append the
said certificate to the complaint, as well as to its Compliance dated March 6,
2000. It was only on January 26, 2001 when the respondent filed its comment
30
in the CA that it submitted the Secretarys/Resident Agents Certificate dated
January 10, 2000.
The Court is, thus, more inclined to believe that the alleged teleconference on
June 25, 1999 never took place, and that the resolution allegedly approved by
the respondents Board of Directors during the said teleconference was a mere
concoction purposefully foisted on the RTC, the CA and this Court, to avert the
dismissal of its complaint against the petitioner.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision
of the Court of Appeals in CA-G.R. SP No. 61000 is REVERSED and SET
ASIDE. The Regional Trial Court of Manila is hereby ORDERED to dismiss,
without prejudice, the complaint of the respondent.
SO ORDERED.

Puno, Acting C.J., (Chairman), Austria-Martinez, and Chico-Nazario, JJ.,

concur.
Tinga, J., out of the country.