Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-23145

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. 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 (1 Fletcher, Cyclopedia
Corporations, pp. 19-20)

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 oppositorappellant.
SYLLABUS
1. REMEDIAL LAW; SPECIAL PROCEEDINGS; SETTLEMENT
OF ESTATE; WHEN ANCILLARY ADMINISTRATION IS
PROPER. The ancillary administration is proper, whenever a
person dies, leaving in a country other than that of his last
domicile, property to be administered in the nature of assets of
the deceased liable for his individual debts or to be distributed
among his heirs (Johannes v. Harvey, 43 Phil. 175). Ancillary
administration is necessary or the reason for such administration
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.
2. ID.; ID.; ID.; SCOPE OF POWER AND AUTHORITY OF AN
ANCILLARY ADMINISTRATOR. No one could dispute the
power of an ancillary administrator to gain control and possession
of all assets of the decedent within the jurisdiction of the
Philippines. Such a power is inherent in his duty to settle her
estate and satisfy the claims of local creditors (Rule 84, Sec. 3,
Rules of Court. Cf Pavia v. De la Rosa, 8 Phil. 70; Liwanag v.
Reyes, L-19159, Sept. 29, 1964; Ignacio v. Elchico, L-18937, May
16, 1967; etc.). It is a general rule universally recognized that
administration, whether principal or ancillary, certainly extends to
the assets of a decedent found within the state or country where it
was granted, the corollary being "that an administrator appointed
in one state or country has no power over property in another
state or country" (Leon and Ghezzi v. Manufacturers Life Ins. Co.,
90 Phil. 459).
3. ID.; ID.; ID.; ID.; CASE AT BAR. Since, in the case at bar,
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 a party or entity.
4. CORPORATION LAW; CORPORATIONS; CONCEPT AND
NATURE. A corporation is an artificial being created by
operation of law (Sec. 2, Act No. 1459). A corporation as known to
Philippine jurisprudence is a creature without any existence until it
has received the imprimatur of the state acting 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

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

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CORPORATION LAW | 1

It is to be noted further that appellant Benguet Consolidated, Inc.

admits that "it is immaterial" as far as it is concerned as to "who is
entitled to the possession of the stock certificates in question;
appellant opposed the petition of the ancillary administrator
because the said stock certificates are in existence, they are
today in the possession of the domiciliary administrator, the
County Trust Company, in New York, U.S.A...."4
It is its view, therefore, that under the circumstances, the stock
certificates cannot be declared or considered as lost. Moreover, it
would allege that there was a failure to observe certain
requirements of its by-laws before new stock certificates could be
issued. Hence, its appeal.
As was made clear at the outset of this opinion, the appeal lacks
merit. The challenged order constitutes an emphatic affirmation of
judicial authority sought to be emasculated by the wilful conduct
of the domiciliary administrator in refusing to accord obedience to
a court decree. How, then, can this order be stigmatized as
illegal?
As is true of many problems confronting the judiciary, such a
response was called for by the realities of the situation. What
cannot be ignored is that conduct bordering on wilful defiance, if it
had not actually reached it, cannot without undue loss of judicial
prestige, be condoned or tolerated. For the law is not so lacking in
flexibility and resourcefulness as to preclude such a solution, the
more so as deeper reflection would make clear its being
buttressed by indisputable principles and supported by the
strongest policy considerations.
It can truly be said then that the result arrived at upheld and
vindicated the honor of the judiciary no less than that of the
country. Through this challenged order, there is thus dispelled the
atmosphere of contingent frustration brought about by the
persistence of the domiciliary administrator to hold on to the stock
certificates after it had, as admitted, voluntarily submitted itself to
the jurisdiction of the lower court by entering its appearance
through counsel on June 27, 1963, and filing a petition for relief
from a previous order of March 15, 1963.
Thus did the lower court, in the order now on appeal, impart
vitality and effectiveness to what was decreed. For without it, what
it had been decided would be set at naught and nullified. Unless
such a blatant disregard by the domiciliary administrator, with
residence abroad, of what was previously ordained by a court
order could be thus remedied, it would have entailed, insofar as
this matter was concerned, not a partial but a well-nigh complete
paralysis of judicial authority.
1. Appellant Benguet Consolidated, Inc. did not dispute the power
of the appellee ancillary administrator to gain control and
possession of all assets of the decedent within the jurisdiction of
the Philippines. Nor could it. Such a power is inherent in his duty
to settle her estate and satisfy the claims of local creditors. 5 As
Justice Tuason speaking for this Court made clear, it is a "general
rule universally recognized" that administration, whether principal
or ancillary, certainly "extends to the assets of a decedent found
within the state or country where it was granted," the corollary
being "that an administrator appointed in one state or country has
no power over property in another state or country." 6
It is to be noted that the scope of the power of the ancillary
administrator was, in an earlier case, set forth by Justice Malcolm.
Thus: "It is often necessary to have more than one administration
of an estate. When a person dies intestate owning property in the

country of his domicile as well as in a foreign country,

administration is had in both countries. That which is granted in
the jurisdiction of decedent's last domicile is termed the principal
administration, while any other administration is termed the
ancillary administration. The reason for the latter is because a
grant of administration does not ex proprio vigore have any effect
beyond the limits of the country in which it is granted. Hence, an
administrator appointed in a foreign state has no authority in the
[Philippines]. The ancillary administration is proper, whenever a
person dies, leaving in a country other than that of his last
domicile, property to be administered in the nature of assets of
the deceased liable for his individual debts or to be distributed
among his heirs."7
It would follow then that the authority of the probate court to
require that ancillary administrator's right to "the stock certificates
covering the 33,002 shares ... standing in her name in the books
of [appellant] Benguet Consolidated, Inc...." be respected is
equally beyond question. For appellant is a Philippine corporation
owing full allegiance and subject to the unrestricted jurisdiction of
local courts. Its shares of stock cannot therefore be considered in
any wise as immune from lawful court orders.
Our holding in Wells Fargo Bank and Union v. Collector of Internal
Revenue8 finds application. "In the instant case, the actual situs of
the shares of stock is in the Philippines, the corporation being
domiciled [here]." To the force of the above undeniable
proposition, not even appellant is insensible. It does not dispute it.
Nor could it successfully do so even if it were so minded.
2. In the face of such incontrovertible doctrines that argue in a
rather conclusive fashion for the legality of the challenged order,
how does appellant, Benguet Consolidated, Inc. propose to carry
the extremely heavy burden of persuasion of precisely
demonstrating the contrary? It would assign as the basic error
allegedly committed by the lower court its "considering as lost the
stock certificates covering 33,002 shares of Benguet belonging to
the deceased Idonah Slade Perkins, ..." 9 More specifically,
appellant would stress that the "lower court could not "consider as
lost" the stock certificates in question when, as a matter of fact,
his Honor the trial Judge knew, and does know, and it is admitted
by the appellee, that the said stock certificates are in existence
and are today in the possession of the domiciliary administrator in
New York."10
There may be an element of fiction in the above view of the lower
court. That certainly does not suffice to call for the reversal of the
appealed order. Since there is a refusal, persistently adhered to
by the domiciliary administrator in New York, to deliver the shares
of stocks of appellant corporation owned by the decedent to the
ancillary administrator in the Philippines, there was nothing
unreasonable or arbitrary in considering them as lost and
requiring the appellant to issue new certificates in lieu thereof.
Thereby, the task incumbent under the law on the ancillary
administrator could be discharged and his responsibility fulfilled.
Any other view would result in the compliance to a valid judicial
order being made to depend on the uncontrolled discretion of the
party or entity, in this case domiciled abroad, which thus far has
shown the utmost persistence in refusing to yield obedience.
Certainly, appellant would not be heard to contend in all
seriousness that a judicial decree could be treated as a mere
scrap of paper, the court issuing it being powerless to remedy its
flagrant disregard.
It may be admitted of course that such alleged loss as found by
the lower court did not correspond exactly with the facts. To be

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CORPORATION LAW | 2

more blunt, the quality of truth may be lacking in such a

conclusion arrived at. It is to be remembered however, again to
borrow from Frankfurter, "that fictions which the law may rely
upon in the pursuit of legitimate ends have played an important
part in its development."11
Speaking of the common law in its earlier period, Cardozo could
state fictions "were devices to advance the ends of justice, [even
if] clumsy and at times offensive." 12 Some of them have persisted
even to the present, that eminent jurist, noting "the quasi contract,
the adopted child, the constructive trust, all of flourishing vitality,
to attest the empire of "as if" today."13 He likewise noted "a class
of fictions of another order, the fiction which is a working tool of
thought, but which at times hides itself from view till reflection and
analysis have brought it to the light."14
What cannot be disputed, therefore, is the at times indispensable
role that fictions as such played in the law. There should be then
on the part of the appellant a further refinement in the catholicity
of its condemnation of such judicial technique. If ever an occasion
did call for the employment of a legal fiction to put an end to the
anomalous situation of a valid judicial order being disregarded
with apparent impunity, this is it. What is thus most obvious is that
this particular alleged error does not carry persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to bolster the
above contention by its invoking one of the provisions of its bylaws which would set forth the procedure to be followed in case of
a lost, stolen or destroyed stock certificate; it would stress that in
the event of a contest or the pendency of an action regarding
ownership of such certificate or certificates of stock allegedly lost,
stolen or destroyed, the issuance of a new certificate or
certificates would await the "final decision by [a] court regarding
the ownership [thereof]."15
Such reliance is misplaced. In the first place, there is no such
occasion to apply such by-law. It is admitted that the foreign
domiciliary administrator did not appeal from the order now in
question. Moreover, there is likewise the express admission of
appellant that as far as it is concerned, "it is immaterial ... who is
entitled to the possession of the stock certificates ..." Even if such
were not the case, it would be a legal absurdity to impart to such
a provision conclusiveness and finality. Assuming that a
contrariety exists between the above by-law and the command of
a court decree, the latter is to be followed.
It is understandable, as Cardozo pointed out, that the Constitution
overrides a statute, to which, however, the judiciary must yield
deference, when appropriately invoked and deemed applicable. It
would be most highly unorthodox, however, if a corporate by-law
would be accorded such a high estate in the jural order that a
court must not only take note of it but yield to its alleged
controlling force.
The fear of appellant of a contingent liability with which it could be
saddled unless the appealed order be set aside for its
inconsistency with one of its by-laws does not impress us. Its
obedience to a lawful court order certainly constitutes a valid
defense, assuming that such apprehension of a possible court
action against it could possibly materialize. Thus far, nothing in
the circumstances as they have developed gives substance to
such a fear. Gossamer possibilities of a future prejudice to
appellant do not suffice to nullify the lawful exercise of judicial
authority.

4. What is more the view adopted by appellant Benguet

Consolidated, Inc. is fraught with implications at war with the
basic postulates of corporate theory.
We start with the undeniable premise that, "a corporation is an
artificial being created by operation of law...." 16 It owes its life to
the state, its birth being purely dependent on its will. As Berle so
aptly stated: "Classically, a corporation was conceived as an
artificial person, owing its existence through creation by a
sovereign power."17 As a matter of fact, the statutory language
employed owes much to Chief Justice Marshall, who in the
Dartmouth College decision defined a corporation precisely as
"an artificial being, invisible, intangible, and existing only in
contemplation of law."18
The well-known authority Fletcher could summarize the matter
thus: "A corporation is not in fact and in reality a person, but the
law treats it as though it were a person by process of fiction, or by
regarding it as an artificial person distinct and separate from its
individual stockholders.... It owes its existence to law. It is an
artificial person created by law for certain specific purposes, the
extent of whose existence, powers and liberties is fixed by its
charter."19 Dean Pound's terse summary, a juristic person,
resulting from an association of human beings granted legal
personality by the state, puts the matter neatly.20
There is thus a rejection of Gierke's genossenchaft theory, the
basic theme of which to quote from Friedmann, "is the reality of
the group as a social and legal entity, independent of state
recognition and concession."21 A corporation as known to
Philippine jurisprudence is a creature without any existence until it
has received the imprimatur of the state according to law. It is
logically inconceivable therefore that it will have rights and
privileges of a higher priority than that of its creator. More than
that, it cannot legitimately refuse to yield obedience to acts of its
state organs, certainly not excluding the judiciary, whenever
called upon to do so.
As a matter of fact, a corporation once it comes into being,
following American law still of persuasive authority in our
jurisdiction, comes more often within the ken of the judiciary than
the other two coordinate branches. It institutes the appropriate
court action to enforce its right. Correlatively, it is not immune
from judicial control in those instances, where a duty under the
law as ascertained in an appropriate legal proceeding is cast
upon it.
To assert that it can choose which court order to follow and which
to disregard is to confer upon it not autonomy which may be
conceded but license which cannot be tolerated. It is to argue that
it may, when so minded, overrule the state, the source of its very
existence; it is to contend that what any of its governmental
organs may lawfully require could be ignored at will. So
extravagant a claim cannot possibly merit approval.
5. One last point. In Viloria v. Administrator of Veterans Affairs, 22 it
was shown that in a guardianship proceedings then pending in a
lower court, the United States Veterans Administration filed a
motion for the refund of a certain sum of money paid to the minor
under guardianship, alleging that the lower court had previously
granted its petition to consider the deceased father as not entitled
to guerilla benefits according to a determination arrived at by its
main office in the United States. The motion was denied. In
seeking a reconsideration of such order, the Administrator relied
on an American federal statute making his decisions "final and
conclusive on all questions of law or fact" precluding any other
American official to examine the matter anew, "except a judge or

VOLENTI NON FIT INJURIA

CORPORATION LAW | 3

judges of the United States court."23 Reconsideration was denied,

and the Administrator appealed.
In an opinion by Justice J.B.L. Reyes, we sustained the lower
court. Thus: "We are of the opinion that the appeal should be
rejected. The provisions of the U.S. Code, invoked by the
appellant, make the decisions of the U.S. Veterans' Administrator
final and conclusive when made on claims property submitted to
him for resolution; but they are not applicable to the present case,
where the Administrator is not acting as a judge but as a litigant.
There is a great difference between actions against the
Administrator (which must be filed strictly in accordance with the
conditions that are imposed by the Veterans' Act, including the
exclusive review by United States courts), and those actions
where the Veterans' Administrator seeks a remedy from our
courts and submits to their jurisdiction by filing actions therein.
Our attention has not been called to any law or treaty that would
make the findings of the Veterans' Administrator, in actions where
he is a party, conclusive on our courts. That, in effect, would
deprive our tribunals of judicial discretion and render them mere
subordinate instrumentalities of the Veterans' Administrator."
It is bad enough as the Viloria decision made patent for our
judiciary to accept as final and conclusive, determinations made
by foreign governmental agencies. It is infinitely worse if through
the absence of any coercive power by our courts over juridical
persons within our jurisdiction, the force and effectivity of their
orders could be made to depend on the whim or caprice of alien
entities. It is difficult to imagine of a situation more offensive to the
dignity of the bench or the honor of the country.
Yet that would be the effect, even if unintended, of the proposition
to which appellant Benguet Consolidated seems to be firmly
committed as shown by its failure to accept the validity of the
order complained of; it seeks its reversal. Certainly we must at all
pains see to it that it does not succeed. The deplorable
consequences attendant on appellant prevailing attest to the
necessity of negative response from us. That is what appellant
will get.
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.

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Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17295

July 30, 1962

ANG PUE & COMPANY, ET AL., plaintiffs-appellants,

vs.
SECRETARY OF COMMERCE AND INDUSTRY, defendantappellee.
Felicisimo E. Escaran for plaintiffs-appellants.
Office of the Solicitor General for defendant-appellees
SYLLABUS
1. PARTNERSHIP; TO ORGANIZE NOT ABSOLUTE RIGHT.
To organize a corporation or partnership that could claim a
juridical personality of its own and transact business as such, is
not a matter of absolute right but a privilege which may be
enjoyed only under such terms as the state may deem necessary
to impose.
2. ID.; ONLY FILIPINOS TO ENGAGE IN RETAIL BUSINESS;
REP. ACT 1180 APPLICABLE TO EXISTING PARTNERSHIP.
The state through Congress had the right to enact Republic Act
No. 1180 providing that only Filipinos may engage in the retail
business and such provision was intended to apply to partnership
owned by foreigners already existing at the time of its enactment
giving them the right to continue engaging in their retail business
until the expiration of their term of life.
3. ID.; AMENDMENT OF ARTICLES OF PARTNERSHIP TO
EXTEND TERM AFTER ENACTMENT OF THE LAW. The
agreement in the articles of partnership to extend the term of its
life is not a property right and it must be deemed subject to the
law existing at the time when the partners came to agree
regarding the extension. In the case at bar, when the partners
amended the articles of partnership, the provisions of Republic
Act 1180 were already in force, and there can be not the slightest
doubt that the right claimed by appellants to extend the original
term of their partnership to another five years would be in violation
of the clear intent and purpose of said Act.
DIZON, J.:
Action for declaratory relief filed in the Court of First Instance of
Iloilo by Ang Pue & Company, Ang Pue and Tan Siong against the
Secretary of Commerce and Industry to secure judgment
"declaring that plaintiffs could extend for five years the term of the
partnership pursuant to the provisions of plaintiffs' Amendment to
the Article of Co-partnership."
The answer filed by the defendant alleged, in substance, that the
extension for another five years of the term of the plaintiffs'
partnership would be in violation of the provisions of Republic Act
No. 1180.

wholesale and retail, particularly of lumber, hardware and other

construction materials for commerce, either native or foreign." The
corresponding articles of partnership (Exhibit B) were registered
in the Office of the Securities & Exchange Commission on June
16, 1953.
On June 19, 1954 Republic Act No. 1180 was enacted to regulate
the retail business. It provided, among other things, that, after its
enactment, a partnership not wholly formed by Filipinos could
continue to engage in the retail business until the expiration of its
term.
On April 15, 1958 prior to the expiration of the five-year term of
the partnership Ang Pue & Company, but after the enactment of
the Republic Act 1180, the partners already mentioned amended
the original articles of part ownership (Exhibit B) so as to extend
the term of life of the partnership to another five years. When the
amended articles were presented for registration in the Office of
the Securities & Exchange Commission on April 16, 1958,
registration was refused upon the ground that the extension was
in violation of the aforesaid Act.
From the decision of the lower court dismissing the action, with
costs, the plaintiffs interposed this appeal.
The question before us is too clear to require an extended
discussion. To organize a corporation or a partnership that could
claim a juridical personality of its own and transact business as
such, is not a matter of absolute right but a privilege which may
be enjoyed only under such terms as the State may deem
necessary to impose. That the State, through Congress, and in
the manner provided by law, had the right to enact Republic Act
No. 1180 and to provide therein that only Filipinos and concerns
wholly owned by Filipinos may engage in the retail business can
not be seriously disputed. That this provision was clearly intended
to apply to partnership already existing at the time of the
enactment of the law is clearly showing by its provision giving
them the right to continue engaging in their retail business until
the expiration of their term or life.
To argue that because the original articles of partnership provided
that the partners could extend the term of the partnership, the
provisions of Republic Act 1180 cannot be adversely affect
appellants herein, is to erroneously assume that the aforesaid
provision constitute a property right of which the partners can not
be deprived without due process or without their consent. The
agreement contain therein must be deemed subject to the law
existing at the time when the partners came to agree regarding
the extension. In the present case, as already stated, when the
partners amended the articles of partnership, the provisions of
Republic Act 1180 were already in force, and there can be not the
slightest doubt that the right claimed by appellants to extend the
original term of their partnership to another five years would be in
violation of the clear intent and purpose of the law aforesaid.
WHEREFORE, the judgment appealed from is affirmed, with
costs.

It appears that on May 1, 1953, Ang Pue and Tan Siong, both
Chinese citizens, organized the partnership Ang Pue & Company
for a term of five years from May 1, 1953, extendible by their
mutual consent. The purpose of the partnership was "to maintain
the business of general merchandising, buying and selling at

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CORPORATION LAW | 5

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 125469 October 27, 1997
PHILIPPINE STOCK EXCHANGE, INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND
EXCHANGE COMMISSION and PUERTO AZUL LAND, INC.,
respondents.
TORRES, JR., J.:
The Securities and Exchange Commission is the government
agency, under the direct general supervision of the Office of the
President, 1 with the immense task of enforcing the Revised
Securities Act, and all other duties assigned to it by pertinent
laws. Among its inumerable functions, and one of the most
important, is the supervision of all corporations, partnerships or
associations, who are grantees of primary franchise and/or a
license or permit issued by the government to operate in the
Philippines. 2 Just how far this regulatory authority extends,
particularly, with regard to the Petitioner Philippine Stock
Exchange, Inc. is the issue in the case at bar.
In this Petition for Review on Certiorari, petitioner assails the
resolution of the respondent Court of Appeals, dated June 27,
1996, which affirmed the decision of the Securities and Exchange
Commission ordering the petitioner Philippine Stock Exchange,
Inc. to allow the private respondent Puerto Azul Land, Inc. to be
listed in its stock market, thus paving the way for the public
offering of PALI's shares.
The facts of the case are undisputed, and are hereby restated in
sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate
corporation, had sought to offer its shares to the public in order to
raise funds allegedly to develop its properties and pay its loans
with several banking institutions. In January, 1995, PALI was
issued a Permit to Sell its shares to the public by the Securities
and Exchange Commission (SEC). To facilitate the trading of its
shares among investors, PALI sought to course the trading of its
shares through the Philippine Stock Exchange, Inc. (PSE), for
which purpose it filed with the said stock exchange an application
to list its shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a
perusal of PALI's application, recommended to the PSE's Board
of Governors the approval of PALI's listing application.
On February 14, 1996, before it could act upon PALI's application,
the Board of Governors of the PSE received a letter from the heirs
of Ferdinand E. Marcos, claiming that the late President Marcos
was the legal and beneficial owner of certain properties forming
part of the Puerto Azul Beach Hotel and Resort Complex which
PALI claims to be among its assets and that the Ternate
Development Corporation, which is among the stockholders of
PALI, likewise appears to have been held and continue to be held
in trust by one Rebecco Panlilio for then President Marcos and
now, effectively for 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. 902A, 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.

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CORPORATION LAW | 6

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 to look into the decision of the petitioner PSE,
pursuant to Section 3 3 of the Revised Securities Act in relation to
Section 6(j) and 6(m) 4 of P.D. No. 902-A, and Section 38(b) 5 of
the Revised Securities Act, and for the purpose of ensuring fair
administration of the exchange. Both as a corporation and as a
stock exchange, the petitioner is subject to public respondent's
jurisdiction, regulation and control. Accepting the argument that
the public respondent has the authority merely to supervise or
regulate, would amount to serious consequences, considering
that the petitioner is a stock exchange whose business is
impressed with public interest. Abuse is not remote if the public
respondent is left without any system of control. If the securities
act vested the public respondent with jurisdiction and control over
all corporations; the power to authorize the establishment of stock
exchanges; the right to supervise and regulate the same; and the
power to alter and supplement rules of the exchange in the listing
or delisting of securities, then the law certainly granted to the
public respondent the plenary authority over the petitioner; and
the power of review necessarily comes within its authority.
All in all, the court held that PALI complied with all the
requirements for public listing, affirming the SEC's ruling to the
effect that:
. . . the Philippine Stock Exchange has acted
in an arbitrary and abusive manner in
disapproving the application of PALI for listing
of its shares in the face of the following
considerations:
1. PALI has clearly and admittedly complied
with the Listing Rules and full disclosure
requirements of the Exchange;
2. In applying its clear and reasonable
standards on the suitability for listing of
shares, PSE has failed to justify why it acted
differently on the application of PALI, as
compared to the IPOs of other companies
similarly situated that were allowed listing in
the Exchange;
3. It appears that the claims and issues on
the title to PALI's properties were even less
serious than the claims against the assets of
the other companies in that, the assertions of
the Marcoses that they are owners of the
disputed properties were not substantiated
enough to overcome the strength of a title to
properties issued under the Torrens System
as evidence of ownership thereof;
4. No action has been filed in any court of
competent jurisdiction seeking to nullify
PALI's ownership over the disputed
properties, neither has the government
instituted recovery proceedings against these
properties. Yet the import of PSE's decision in
denying PALI's application is that it would be
PALI, not the Marcoses, that must go to court
to prove the legality of its ownership on these
properties before its shares can be listed.
In addition, the argument that the PALI properties belong to the
Military/Naval Reservation does not inspire belief. The point is,

VOLENTI NON FIT INJURIA

CORPORATION LAW | 7

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 stock exchanges. 6
These provisions, read together with the general grant of
jurisdiction, and right of supervision and control over all
corporations under Sec. 3 of P.D. 902-A, give the SEC the special
mandate to be vigilant in the supervision of the affairs of stock
exchanges so that the interests of the investing public may be
fully safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough
authority to uphold the SEC's challenged control authority over
the petitioner PSE even as it provides that "the Commission shall
have absolute jurisdiction, supervision, and control over all
corporations, partnerships or associations, who are the grantees
of primary franchises and/or a license or permit issued by the
government to operate in the Philippines. . ." The SEC's
regulatory authority over private corporations encompasses a
wide margin of areas, touching nearly all of a corporation's
concerns. This authority springs from the fact that a corporation
owes its existence to the concession of its corporate franchise
from the state.
The SEC's power to look into the subject ruling of the PSE,
therefore, may be implied from or be considered as necessary or
incidental to the carrying out of the SEC's express power to insure
fair dealing in securities traded upon a stock exchange or to

VOLENTI NON FIT INJURIA

CORPORATION LAW | 8

ensure the fair administration of such exchange. 7 It is, likewise,

observed that the principal function of the SEC is the supervision
and control over corporations, partnerships and associations with
the end in view that investment in these entities may be
encouraged and protected, and their activities for the promotion of
economic development. 8
Thus, it was in the alleged exercise of this authority that the SEC
reversed the decision of the PSE to deny the application for listing
in the stock exchange of the private respondent PALI. The SEC's
action was affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to
whether or not securities, including shares of stock of a
corporation, may be traded or not in the stock exchange. This is in
line with the SEC's mission to ensure proper compliance with the
laws, such as the Revised Securities Act and to regulate the sale
and disposition of securities in the country. 9 As the appellate
court explains:
Paramount policy also supports the authority
of the public respondent to review petitioner's
denial of the listing. Being a stock exchange,
the petitioner performs a function that is vital
to the national economy, as the business is
affected with public interest. As a matter of
fact, it has often been said that the economy
moves on the basis of the rise and fall of
stocks being traded. By its economic power,
the petitioner certainly can dictate which and
how many users are allowed to sell securities
thru the facilities of a stock exchange, if
allowed to interpret its own rules liberally as it
may please. Petitioner can either allow or
deny the entry to the market of securities. To
repeat, the monopoly, unless accompanied
by control, becomes subject to abuse; hence,
considering public interest, then it should be
subject to government regulation.
The role of the SEC in our national economy cannot be
minimized. The legislature, through the Revised Securities Act,
Presidential Decree No. 902-A, and other pertinent laws, has
entrusted to it the serious responsibility of enforcing all laws
affecting corporations and other forms of associations not
otherwise vested in some other government office. 10
This is not to say, however, that the PSE's management
prerogatives are under the absolute control of the SEC. The PSE
is, alter all, a corporation authorized by its corporate franchise to
engage in its proposed and duly approved business. One of the
PSE's main concerns, as such, is still the generation of profit for
its stockholders. Moreover, the PSE has all the rights pertaining to
corporations, including the right to sue and be sued, to hold
property in its own name, to enter (or not to enter) into contracts
with third persons, and to perform all other legal acts within its
allocated express or implied powers.
A corporation is but an association of individuals, allowed to
transact under an assumed corporate name, and with a distinct
legal personality. In organizing itself as a collective body, it waives
no constitutional immunities and perquisites appropriate to such a
body. 11 As to its corporate and management decisions, therefore,
the state will generally not interfere with the same. Questions of
policy and of management are left to the honest decision of the
officers and directors of a corporation, and the courts are without
authority to substitute their judgment for the judgment of the

board of directors. The board is the business manager of the

corporation, and so long as it acts in good faith, its orders are not
reviewable by the courts. 12
Thus, notwithstanding the regulatory power of the SEC over the
PSE, and the resultant authority to reverse the PSE's decision in
matters of application for listing in the market, the SEC may
exercise such power only if the PSE's judgment is attended by
bad faith. In Board of Liquidators vs. Kalaw, 13 it was held that bad
faith does not simply connote bad judgment or negligence. It
imports a dishonest purpose or some moral obliquity and
conscious doing of wrong. It means a breach of a known duty
through some motive or interest of ill will, partaking of the nature
of fraud.
In reaching its decision to deny the application for listing of PALI,
the PSE considered important facts, which, in the general
scheme, brings to serious question the qualification of PALI to sell
its shares to the public through the stock exchange. During the
time for receiving objections to the application, the PSE heard
from the representative of the late President Ferdinand E. Marcos
and his family who claim the properties of the private respondent
to be part of the Marcos estate. In time, the PCGG confirmed this
claim. In fact, an order of sequestration has been issued covering
the properties of PALI, and suit for reconveyance to the state has
been filed in the Sandiganbayan Court. How the properties were
effectively transferred, despite the sequestration order, from the
TDC and MSDC to Rebecco Panlilio, and to the private
respondent PALI, in only a short span of time, are not yet
explained to the Court, but it is clear that such circumstances give
rise to serious doubt as to the integrity of PALI as a stock issuer.
The petitioner was in the right when it refused application of PALI,
for a contrary ruling was not to the best interest of the general
public. The purpose of the Revised Securities Act, after all, is to
give adequate and effective protection to the investing public
against fraudulent representations, or false promises, and the
imposition of worthless ventures. 14
It is to be observed that the U.S. Securities Act emphasized its
avowed protection to acts detrimental to legitimate business, thus:
The Securities Act, often referred to as the
"truth in securities" Act, was designed not
only to provide investors with adequate
information upon which to base their
decisions to buy and sell securities, but also
to protect legitimate business seeking to
obtain capital through honest presentation
against competition from crooked promoters
and to prevent fraud in the sale of securities.
(Tenth Annual Report, U.S. Securities &
Exchange Commission, p. 14).
As has been pointed out, the effects of such
an act are chiefly (1) prevention of excesses
and fraudulent transactions, merely by
requirement of that their details be revealed;
(2) placing the market during the early stages
of the offering of a security a body of
information, which operating indirectly
through investment services and expert
investors, will tend to produce a more
accurate appraisal of a security, . . . Thus, the
Commission may refuse to permit a
registration statement to become effective if it
appears on its face to be incomplete or
inaccurate in any material respect, and

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CORPORATION LAW | 9

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 its
securities. 15 While the employment of this policy is recognized
and sanctioned by the laws, nonetheless, the Revised Securities
Act sets substantial and procedural standards which a proposed
issuer of securities must satisfy. 16 Pertinently, Section 9 of the
Revised Securities Act sets forth the possible Grounds for the
Rejection of the registration of a security:
The Commission may reject a registration
statement and refuse to issue a permit to sell
the securities included in such registration
statement if it finds that
(1) The registration statement is on its face
incomplete or inaccurate in any material
respect or includes any untrue statement of a
material fact or omits to state a material fact
required to be stated therein or necessary to
make the statements therein not misleading;
or
(2) The issuer or registrant
(i) is not solvent or not in sound
financial condition;
(ii) has violated or has not complied
with the provisions of this Act, or the
rules promulgated pursuant thereto,
or any order of the Commission;
(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;

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CORPORATION LAW | 10

(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 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.
Mendoza, J., concurs in the result.

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CORPORATION LAW | 11

Republic of the Philippines

SUPREME COURT
Manila

obtained a judgment against him from the trial court and the said
judgment has long been final and executory.
GANCAYCO, J.:

FIRST DIVISION
G.R. No. L-67626 April 18, 1989
JOSE REMO, JR., petitioner,
vs.
THE HON. INTERMEDIATE APPELLATE COURT and E.B.
MARCHA TRANSPORT COMPANY, INC., represented by
APIFANIO B. MARCHA, respondents.
Orbos, Cabusora, Dumlao & Sta. Ana for petitioner.
SYLLABUS
1. COMMERCIAL LAW; CORPORATION; DEFINED. A
corporation is an entity separate and distinct from its
stockholders. While not in fact and in reality a person, the law
treats a corporation as though it were a person by process of
fiction or by regarding it as an artificial person distinct and
separate
from
its
individual
stockholders.
2. ID.; ID.; INSTANCES WHEN CORPORATE FICTION MAY BE
DISREGARDED. The corporate fiction or the notion of legal
entity may be disregarded when it "is used to defeat public
convenience, justify wrong, protect fraud, or defend crime" in
which instances "the law will regard the corporation as an
association of persons, or in case of two corporations, will merge
them into one." The corporate fiction may also be disregarded
when it is the "mere alter ego or business conduit of a person."
There are many occasions when this Court pierced the corporate
veil because of its use to protect fraud and to justify wrong.
3. ID.; NEGOTIABLE INSTRUMENTS; PROMISSORY NOTE;
PERSON NOT A SIGNATORY THERETO CANNOT BE BOUND
THEREBY. The promissory note was signed by Coprada to
guarantee the payment of the unpaid balance of the purchase
price out of the proceeds of a loan he supposedly sought from the
DBP. The word "WE" in the said promissory note must refer to the
corporation which Coprada represented in the execution of the
note and not its stockholders or directors. Petitioner did not sign
the said promissory note so he cannot be personally bound
thereby.
4. CIVIL LAW; CONTRACTS; CHATTEL MORTGAGE; HAS A
PRIOR LIEN AGAINST THE PACTO DE RETRO SALE. The
sale of the two units are not inherently fraudulent as the 13 units
were sold through a deed of absolute sale to Akron so that the
corporation is free to dispose of the same. Of course, it was
stipulated that in case of default in payment to private respondent
of the balance of the consideration, a chattel mortgage lien shall
be constituted on the 13 units. Nevertheless, said mortgage is a
prior lien as against the pacto de retro sale of the 2 units.
5. REMEDIAL LAW; EVIDENCE; FRAUD; MUST BE
ESTABLISHED BY CLEAR AND CONVINCING EVIDENCE. If
the private respondent is the victim of fraud in this transaction, it
has not been clearly shown that petitioner had any part or
participation in the perpetration of the same. Fraud must be
established by clear and convincing evidence. If at all, the
principal character on whom fault should be attributed is Feliciano
Coprada, the President of Akron, whom private respondent dealt
with personally all through out. Fortunately, private respondent

A corporation is an entity separate and distinct from its

stockholders. While not in fact and in reality a person, the law
treats a corporation as though it were a person by process of
fiction or by regarding it as an artificial person distinct and
separate from its individual stockholders. 1
However, the corporate fiction or the notion of legal entity may be
disregarded when it "is used to defeat public convenience, justify
wrong, protect fraud, or defend crime" in which instances "the law
will regard the corporation as an association of persons, or in
case of two corporations, will merge them into one." The
corporate fiction may also be disregarded when it is the "mere
alter ego or business conduit of a person." 2 There are many
occasions when this Court pierced the corporate veil because of
its use to protect fraud and to justify wrong. 3 The herein petition
for review of a. resolution of the Intermediate Appellate Court
dated February 8, 1984 seeking the reversal thereof and the
reinstatement of its earlier decision dated June 30, 1983 in ACG.R. No. 68496-R 4 calls for the application of the foregoing
principles.
In the latter part of December, 1977 the board of directors of
Akron Customs Brokerage Corporation (hereinafter referred to as
Akron), composed of petitioner Jose Remo, Jr., Ernesto Baares,
Feliciano Coprada, Jemina Coprada, and Dario Punzalan with
Lucia Lacaste as Secretary, adopted a resolution authorizing the
purchase of thirteen (13) trucks for use in its business to be paid
out of a loan the corporation may secure from any lending
institution. 5
Feliciano Coprada, as President and Chairman of Akron,
purchased thirteen trucks from private respondent on January 25,
1978 for and in consideration of P525,000.00 as evidenced by a
deed of absolute sale. 6 In a side agreement of the same date,
the parties agreed on a downpayment in the amount of
P50,000.00 and that the balance of P475,000.00 shall be paid
within sixty (60) days from the date of the execution of the
agreement. The parties also agreed that until said balance is fully
paid, the down payment of P50,000.00 shall accrue as rentals of
the 13 trucks; and that if Akron fails to pay the balance within the
period of 60 days, then the balance shall constitute as a chattel
mortgage lien covering said cargo trucks and the parties may
allow an extension of 30 days and thereafter private respondent
may ask for a revocation of the contract and the reconveyance of
all said trucks. 7
The obligation is further secured by a promissory note executed
by Coprada in favor of Akron. It is stated in the promissory note
that the balance shall be paid from the proceeds of a loan
obtained from the Development Bank of the Philippines (DBP)
within sixty (60) days. 8 After the lapse of 90 days, private
respondent tried to collect from Coprada but the latter promised to
pay only upon the release of the DBP loan. Private respondent
sent Coprada a letter of demand dated May 10, 1978. 9 In his
reply to the said letter, Coprada reiterated that he was applying for
a loan from the DBP from the proceeds of which payment of the
obligation shall be made. 10
Meanwhile, two of the trucks were sold under a pacto de retro
sale to a certain Mr. Bais of the Perpetual Loans and Savings
Bank at Baclaran. The sale was authorized by a board resolution
made in a meeting held on March 15, 1978. 11

VOLENTI NON FIT INJURIA

CORPORATION LAW | 12

Upon inquiry, private respondent found that no loan application

was ever filed by Akron with DBP. 12
In the meantime, Akron paid rentals of P500.00 a day pursuant to
a subsequent agreement, from April 27, 1978 (the end of the 90day period to pay the balance) to May 31, 1978. Thereafter, no
more rental payments were made.
On June 17, 1978, Coprada wrote private respondent begging for
a grace period of until the end of the month to pay the balance of
the purchase price; that he will update the rentals within the week;
and in case he fails, then he will return the 13 units should private
respondent elect to get back the same. 13 Private respondent,
through counsel, wrote Akron on August 1, 1978 demanding the
return of the 13 trucks and the payment of P25,000.00 back
rentals covering the period from June 1 to August 1, 1978. 14
Again, Coprada wrote private respondent on August 8, 1978
asking for another grace period of up to August 31, 1978 to pay
the balance, stating as well that he is expecting the approval of
his loan application from a certain financing company, and that
ten (10) trucks have been returned to Bagbag, Novaliches. 15 On
December 9, 1978, Coprada informed private respondent anew
that he had returned ten (10) trucks to Bagbag and that a
resolution was passed by the board of directors confirming the
deed of assignment to private respondent of P475,000 from the
proceeds of a loan obtained by Akron from the State Investment
House, Inc. 16
In due time, private respondent filed a compliant for the recovery
of P525,000.00 or the return of the 13 trucks with damages
against Akron and its officers and directors, Feliciano Coprada,
Dario D. Punzalan, Jemina Coprada, Lucia Lacaste, Wilfredo
Layug, Arcadio de la Cruz, Francisco Clave, Vicente Martinez,
Pacifico Dollario and petitioner with the then Court of First
Instance of Rizal. Only petitioner answered the complaint denying
any participation in the transaction and alleging that Akron has a
distinct corporate personality. He was, however, declared in
default for his failure to attend the pre-trial.
In the meanwhile, petitioner sold all his shares in Akron to
Coprada. It also appears that Akron amended its articles of
incorporation thereby changing its name to Akron Transport
International, Inc. which assumed the liability of Akron to private
respondent.
After an ex parte reception of the evidence of the private
respondent, a decision was rendered on October 28, 1980, the
dispositive part of which reads as follows:
Finding the evidence sufficient to prove the case of the plaintiff,
judgment is hereby rendered in favor of the plaintiff and against
the defendants, ordering them jointly and severally to pay;
a the purchase price of the trucks in the amount of
P525,000.00 with ... legal rate (of interest) from the filing of
the complaint until the full amount is paid;
b rentals of Bagbag property at P1,000.00 a month from
August 1978 until the premises is cleared of the said trucks;
c attorneys fees of P10,000.00, and
d costs of suit.

The P50,000.00 given as down payment shall pertain as rentals

of the trucks from June 1 to August 1, 1978 which is P25,000.00
(see demand letter of Atty. Aniano Exhibit "T") and the remaining
P25,000.00 shall be from August 1, 1978 until the trucks are
removed totally from the place." 17
A motion for new trial filed by petitioner was denied so he
appealed to the then Intermediate Appellate Court (IAC) wherein
in due course a decision was rendered on June 30, 1 983 setting
aside the said decision as far as petitioner is concemed. However,
upon a motion for reconsideration filed by private respondent
dent, the IAC, in a resolution dated February 8,1984, set aside the
decision dated June 30, 1983. The appellate court entered
another decision affirming the appealed decision of the trial court,
with costs against petitioner.
Hence, this petition for review wherein petitioner raises the
following issues:
I. The Intermediate Appellate Court (IAC) erred in
disregarding the corporate fiction and in holding the
petitioner personally liable for the obligation of the
Corporation which decision is patently contrary to law and
the applicable decision thereon.
II. The Intermediate Appellate Court (IAC) committed grave
error of law in its decision by sanctioning the merger of the
personality of the corporation with that of the petitioner
when the latter was held liable for the corporate debts. 18
We reverse.
The environmental facts of this case show that there is no cogent
basis to pierce the corporate veil of Akron and hold petitioner
personally liable for its obligation to private respondent. While it is
true that in December, 1977 petitioner was still a member of the
board of directors of Akron and that he participated in the
adoption of a resolution authorizing the purchase of 13 trucks for
the use in the brokerage business of Akron to be paid out of a
loan to be secured from a lending institution, it does not appear
that said resolution was intended to defraud anyone and more
particularly private respondent. It was Coprada, President and
Chairman of Akron, who negotiated with said respondent for the
purchase of 13 cargo trucks on January 25, 1978. It was Coprada
who signed a promissory note to guarantee the payment of the
unpaid balance of the purchase price out of the proceeds of a
loan he supposedly sought from the DBP. The word "WE' in the
said promissory note must refer to the corporation which Coprada
represented in the execution of the note and not its stockholders
or directors. Petitioner did not sign the said promissory note so he
cannot be personally bound thereby.
Thus, if there was any fraud or misrepresentation that was foisted
on private respondent in that there was a forthcoming loan from
the DBP when it fact there was none, it is Coprada who should
account for the same and not petitioner.
As to the sale through pacto de retro of the two units to a third
person by the corporation by virtue of a board resolution,
petitioner asserts that he never signed said resolution. Be that as
it may, the sale is not inherently fraudulent as the 13 units were
sold through a deed of absolute sale to Akron so that the
corporation is free to dispose of the same. Of course, it was
stipulated that in case of default in payment to private respondent
of the balance of the consideration, a chattel mortgage lien shag

VOLENTI NON FIT INJURIA

CORPORATION LAW | 13

be constituted on the 13 units. Nevertheless, said mortgage is a

prior lien as against the pacto de retro sale of the 2 units.
As to the amendment of the articles of incorporation of Akron
thereby changing its name to Akron Transport International, Inc.,
petitioner alleges that the change of corporate name was in order
to include trucking and container yard operations in its customs
brokerage of which private respondent was duly informed in a
letter. 19 Indeed, the new corporation confirmed and assumed the
obligation of the old corporation. There is no indication of an
attempt on the part of Akron to evade payment of its obligation to
private respondent.
There is the fact that petitioner sold his shares in Akron to
Coprada during the pendency of the case. Since petitioner has no
personal obligation to private respondent, it is his inherent right as
a stockholder to dispose of his shares of stock anytime he so
desires.
Mention is also made of the alleged "dumping" of 10 units in the
premises of private respondent at Bagbag, Novaliches which to
the mind of the Court does not prove fraud and instead appears
to be an attempt on the part of Akron to attend to its obligations as
regards the said trucks. Again petitioner has no part in this.
If the private respondent is the victim of fraud in this transaction, it
has not been clearly shown that petitioner had any part or
participation in the perpetration of the same. Fraud must be
established by clear and convincing evidence. If at all, the
principal character on whom fault should be attributed is Feliciano
Coprada, the President of Akron, whom private respondent dealt
with personally all through out. Fortunately, private respondent
obtained a judgment against him from the trial court and the said
judgment has long been final and executory.
WHEREFORE, the petition is GRANTED. The questioned
resolution of the Intermediate Appellate Court dated February
8,1984 is hereby set aside and its decision dated June 30,1983
setting aside the decision of the trial court dated October 28, 1980
insofar as petitioner is concemed is hereby reinstated and
affirmed, without costs.
SO ORDERED.
Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.

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CORPORATION LAW | 14

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 129459 September 29, 1998
SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC.,
petitioner,
vs.
COURT OF APPEALS, MOTORICH SALES CORPORATION,
NENITA LEE GRUENBERG, ACL DEVELOPMENT CORP. and
JNM REALTY AND DEVELOPMENT CORP., respondents.
PANGANIBAN, J.:
May corporate treasurer, by herself and without any authorization
from he board of directors, validly sell a parcel of land owned by
the corporation?. May the veil of corporate fiction be pierced on
the mere ground that almost all of the shares of stock of the
corporation are owned by said treasurer and her husband?
The Case
These questions are answered in the negative by this Court in
resolving the Petition for Review on Certiorari before us, assailing
the March 18, 1997 Decision 1 of the Court of Appeals 2 in CA GR
CV No. 46801 which, in turn, modified the July 18, 1994 Decision
of the Regional Trial Court of Makati, Metro Manila, Branch 63 3 in
Civil Case No. 89-3511. The RTC dismissed both the Complaint
and the Counterclaim filed by the parties. On the other hand, the
Court of Appeals ruled:
WHEREFORE, premises considered, the appealed
decision is AFFIRMED WITH MODIFICATION ordering
defendant-appellee Nenita Lee Gruenberg to REFUND
or return to plaintiff-appellant the downpayment of
P100,000.00 which she received from plaintiffappellant. There is no pronouncement as to costs. 4
The petition also challenges the June 10, 1997 CA Resolution
denying reconsideration. 5
The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel Fabricators,
Inc.'s amended complaint alleged that on 14 February 1989,
plaintiff-appellant entered into an agreement with defendantappellee Motorich Sales Corporation for the transfer to it of a
parcel of land identified as Lot 30, Block 1 of the Acropolis
Greens Subdivision located in the District of Murphy, Quezon
City. Metro Manila, containing an area of Four Hundred
Fourteen (414) square meters, covered by TCT No.
(362909) 2876: that as stipulated in the Agreement of 14
February 1989, plaintiff-appellant paid the downpayment in
the sum of One Hundred Thousand (P100,000.00) Pesos,
the balance to be paid on or before March 2, 1989; that on
March 1, 1989. Mr. Andres T. Co, president of plaintiffappellant corporation, wrote a letter to defendant-appellee
Motorich Sales Corporation requesting for a computation of
the balance to be paid: that said letter was coursed through

defendant-appellee's broker. Linda Aduca, who wrote the

computation of the balance: that on March 2, 1989, plaintiffappellant was ready with the amount corresponding to the
balance, covered by Metrobank Cashier's Check No.
004223, payable to defendant-appellee Motorich Sales
Corporation; that plaintiff-appellant and defendant-appellee
Motorich Sales Corporation were supposed to meet in the
office of plaintiff-appellant but defendant-appellee's
treasurer, Nenita Lee Gruenberg, did not appear; that
defendant-appellee Motorich Sales Corporation despite
repeated demands and in utter disregard of its commitments
had refused to execute the Transfer of Rights/Deed of
Assignment which is necessary to transfer the certificate of
title; that defendant ACL Development Corp. is impleaded as
a necessary party since Transfer Certificate of Title No.
(362909) 2876 is still in the name of said defendant; while
defendant JNM Realty & Development Corp. is likewise
impleaded as a necessary party in view of the fact that it is
the transferor of right in favor of defendant-appellee Motorich
Sales Corporation: that on April 6, 1989, defendant ACL
Development Corporation and Motorich Sales Corporation
entered into a Deed of Absolute Sale whereby the former
transferred to the latter the subject property; that by reason
of said transfer, the Registry of Deeds of Quezon City issued
a new title in the name of Motorich Sales Corporation,
represented by defendant-appellee Nenita Lee Gruenberg
and Reynaldo L. Gruenberg, under Transfer Certificate of
Title No. 3571; that as a result of defendants-appellees
Nenita Lee Gruenberg and Motorich Sales Corporation's bad
faith in refusing to execute a formal Transfer of Rights/Deed
of Assignment, plaintiff-appellant suffered moral and nominal
damages which may be assessed against defendantsappellees in the sum of Five Hundred Thousand
(500,000.00) Pesos; that as a result of defendants-appellees
Nenita Lee Gruenberg and Motorich Sales Corporation's
unjustified and unwarranted failure to execute the required
Transfer of Rights/Deed of Assignment or formal deed of
sale in favor of plaintiff-appellant, defendants-appellees
should be assessed exemplary damages in the sum of One
Hundred Thousand (P100,000.00) Pesos; that by reason of
defendants-appellees' bad faith in refusing to execute a
Transfer of Rights/Deed of Assignment in favor of plaintiffappellant, the latter lost the opportunity to construct a
residential building in the sum of One Hundred Thousand
(P100,000.00) Pesos; and that as a consequence of
defendants-appellees Nenita Lee Gruenberg and Motorich
Sales Corporation's bad faith in refusing to execute a deed
of sale in favor of plaintiff-appellant, it has been constrained
to obtain the services of counsel at an agreed fee of One
Hundred Thousand (P100,000.00) Pesos plus appearance
fee for every appearance in court hearings.
In its answer, defendants-appellees Motorich Sales
Corporation and Nenita Lee Gruenberg interposed as
affirmative defense that the President and Chairman of
Motorich did not sign the agreement adverted to in par. 3 of
the amended complaint; that Mrs. Gruenberg's signature on
the agreement (ref: par. 3 of Amended Complaint) is
inadequate to bind Motorich. The other signature, that of Mr.
Reynaldo Gruenberg, President and Chairman of Motorich,
is required: that plaintiff knew this from the very beginning as
it was presented a copy of the Transfer of Rights (Annex B of
amended complaint) at the time the Agreement (Annex B of
amended complaint) was signed; that plaintiff-appellant itself
drafted the Agreement and insisted that Mrs. Gruenberg
accept the P100,000.00 as earnest money; that granting,
without admitting, the enforceability of the agreement,
plaintiff-appellant nonetheless failed to pay in legal tender
within the stipulated period (up to March 2, 1989); that it was

VOLENTI NON FIT INJURIA

CORPORATION LAW | 15

the understanding between Mrs. Gruenberg and plaintiffappellant that the Transfer of Rights/Deed of Assignment will
be signed only upon receipt of cash payment; thus they
agreed that if the payment be in check, they will meet at a
bank designated by plaintiff-appellant where they will encash
the check and sign the Transfer of Rights/Deed. However,
plaintiff-appellant informed Mrs. Gruenberg of the alleged
availability of the check, by phone, only after banking hours.
On the basis of the evidence, the court a quo rendered the
judgment appealed from[,] dismissing plaintiff-appellant's
complaint, ruling that:
The issue to be resolved is: whether plaintiff had
the right to compel defendants to execute a deed
of absolute sale in accordance with the agreement
of February 14, 1989: and if so, whether plaintiff is
entitled to damage.
As to the first question, there is no evidence to
show that defendant Nenita Lee Gruenberg was
indeed authorized by defendant corporation.
Motorich Sales, to dispose of that property
covered by T.C.T. No. (362909) 2876. Since the
property is clearly owned by the corporation.
Motorich Sales, then its disposition should be
governed by the requirement laid down in Sec. 40.
of the Corporation Code of the Philippines, to wit:
Sec. 40, Sale or other disposition of assets.
Subject to the provisions of existing laws on
illegal combination and monopolies, a
corporation may by a majority vote of its board
of directors . . . sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets
including its goodwill . . . when authorized by
the vote of the stockholders representing at
least two third (2/3) of the outstanding capital
stock . . .
No such vote was obtained by defendant
Nenita Lee Gruenberg for that proposed
sale[;] neither was there evidence to show
that the supposed transaction was ratified
by the corporation. Plaintiff should have
been on the look out under these
circumstances. More so, plaintiff himself
[owns] several corporations (tsn dated
August 16, 1993, p. 3) which makes him
knowledgeable on corporation matters.
Regarding the question of damages, the
Court likewise, does not find substantial
evidence to hold defendant Nenita Lee
Gruenberg liable considering that she did
not in anyway misrepresent herself to be
authorized by the corporation to sell the
property to plaintiff (tsn dated September
27, 1991, p. 8).
In the light of the foregoing, the
Court hereby renders judgment
DISMISSING the complaint at
instance for lack of merit.

"Defendants" counterclaim is also

DISMISSED for lack of basis.
(Decision, pp. 7-8; Rollo, pp. 3435)
For clarity, the Agreement dated February 14, 1989 is reproduced
hereunder:
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement, made and entered into by
and between:
MOTORICH
SALES
CORPORATION,
a
corporation
duly
organized and existing
under and by virtue of
Philippine Laws, with
principal office address
at 5510 South Super Hiway cor. Balderama St.,
Pio del Pilar. Makati,
Metro
Manila,
represented herein by its
Treasurer, NENITA LEE
GRUENBERG,
hereinafter referred to as
the TRANSFEROR;
and
SAN
JUAN
STRUCTURAL & STEEL
FABRICATORS,
a
corporation
duly
organized and existing
under and by virtue of
the
laws
of
the
Philippines, with principal
office
address
at
Sumulong
Highway,
Barrio
Mambungan,
Antipolo,
Rizal,
represented herein by its
President, ANDRES T.
CO, hereinafter referred
to as the TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner
of a parcel of land identified as Lot 30 Block 1
of the ACROPOLIS GREENS SUBDIVISION
located at the District of Murphy, Quezon
City, Metro Manila, containing an area of
FOUR
HUNDRED
FOURTEEN
(414)
SQUARE
METERS,
covered
by
a
TRANSFER OF RIGHTS between JNM
Realty & Dev. Corp. as the Transferor and
Motorich Sales Corp. as the Transferee;

VOLENTI NON FIT INJURIA

CORPORATION LAW | 16

NOW, THEREFORE, for and in consideration

of the foregoing premises, the parties have
agreed as follows:
1. That the purchase price shall be at FIVE
THOUSAND TWO HUNDRED PESOS
(P5,200.00) per square meter; subject to
the following terms:

[SG
D.]
[SG
D.]

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

a. Earnest money amounting to ONE
HUNDRED
THOUSAND
PESOS
(P100,000.00), will be paid upon the
execution of this agreement and shall
form part of the total purchase price;
b. Balance shall be payable on or
before March 2, 1989;
2. That the monthly amortization for
month of February 1989 shall be for
account of the Transferor; and that
monthly amortization starting March
1989 shall be for the account of
Transferee;

the
the
the
21,
the

1. Appellant is entitled to compel the appellees to execute

a Deed of Absolute Sale in accordance with the
Agreement of February 14, 1989,
2. Plaintiff is entitled to damages. 7
As stated earlier, the Court of Appeals debunked petitioner's
arguments and affirmed the Decision of the RTC with the
modification that Respondent Nenita Lee Gruenberg was ordered
to refund P100,000 to petitioner, the amount remitted as
"downpayment" or "earnest money." Hence, this petition before
us. 8
The Issues

The transferor warrants that he [sic] is the

lawful owner of the above-described property
and that there [are] no existing liens and/or
encumbrances of whatsoever nature;
In case of failure by the Transferee to pay the
balance on the date specified on 1, (b), the
earnest money shall be forfeited in favor of
the Transferor.
That upon full payment of the balance, the
TRANSFEROR agrees to execute a
TRANSFER
OF
RIGHTS/DEED
OF
ASSIGNMENT in favor of the TRANSFEREE.
IN WITNESS WHEREOF, the parties have
hereunto set their hands this 14th day of
February, 1989 at Greenhills, San Juan,
Metro Manila, Philippines.
MOTORICH SALES CORPORATION SAN
JUAN
STRUCTURAL
&
STEEL
FABRICATORS

Before this Court, petitioner raises the following issues:

I. Whether or not the doctrine of piercing the veil of corporate
fiction is applicable in the instant case
II. Whether or not the appellate court may consider matters
which the parties failed to raise in the lower court
III. Whether or not there is a valid and enforceable contract
between the petitioner and the respondent corporation
IV. Whether or not the Court of Appeals erred in holding that
there is a valid correction/substitution of answer in the
transcript of stenographic note[s].
V. Whether or not respondents are liable for damages and
attorney's fees 9
The Court synthesized the foregoing and will thus discuss them
seriatim as follows:
1. Was there a valid contract of sale between petitioner and
Motorich?

TRANSFEROR TRANSFEREE
[SGD.] [SGD.]

2. May the doctrine of piercing the veil of corporate fiction be

applied to Motorich?

By. NENITA LEE GRUENBERG By: ANDRES

T. CO
Treasurer
President

3. Is the alleged alteration of Gruenberg's testimony as

recorded in the transcript of stenographic notes material to
the disposition of this case?
4. Are respondents liable for damages and attorney's fees?

Signed In the presence of:

The Court's Ruling

VOLENTI NON FIT INJURIA

CORPORATION LAW | 17

The petition is devoid of merit.

a treasurer, whose powers are limited, cannot bind the

corporation in a sale of its assets. 14

First Issue: Validity of Agreement

Petitioner San Juan Structural and Steel Fabricators, Inc. alleges
that on February 14, 1989, it entered through its president, Andres
Co, into the disputed Agreement with Respondent Motorich Sales
Corporation, which was in turn allegedly represented by its
treasurer, Nenita Lee Gruenberg. Petitioner insists that "[w]hen
Gruenberg and Co affixed their signatures on the contract they
both consented to be bound by the terms thereof." Ergo,
petitioner contends that the contract is binding on the two
corporations. We do not agree.
True, Gruenberg and Co signed on February 14, 1989, the
Agreement, according to which a lot owned by Motorich Sales
Corporation was purportedly sold. Such contract, however, cannot
bind Motorich, because it never authorized or ratified such sale.
A corporation is a juridical person separate and distinct from its
stockholders or members. Accordingly, the property of the
corporation is not the property of its stockholders or members and
may not be sold by the stockholders or members without express
authorization from the corporation's board of directors. 10 Section
23 of BP 68, otherwise known as the Corporation Code of the
Philippines, provides;
Sec. 23. The Board of Directors or Trustees.
Unless otherwise provided in this Code,
the corporate powers of all corporations
formed under this Code shall be exercised,
all business conducted and all property of
such corporations controlled and held by the
board of directors or trustees to be elected
from among the holders of stocks, or where
there is no stock, from among the members
of the corporation, who shall hold office for
one (1) year and until their successors are
elected and qualified.
Indubitably, a corporation may act only through its board of
directors or, when authorized either by its bylaws or by its board
resolution, through its officers or agents in the normal course of
business. The general principles of agency govern the relation
between the corporation and its officers or agents, subject to the
articles of incorporation, bylaws, or relevant provisions of law. 11
Thus, this Court has held that "a corporate officer or agent may
represent and bind the corporation in transactions with third
persons to the extent that the authority to do so has been
conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual
course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by
custom and usage, as usually pertaining to the particular officer or
agent, and such apparent powers as the corporation has caused
persons dealing with the officer or agent to believe that it has
conferred." 12
Furthermore, the Court has also recognized the rule that "persons
dealing with an assumed agent, whether the assumed agency be
a general or special one bound at their peril, if they would hold the
principal liable, to ascertain not only the fact of agency but also
the nature and extent of authority, and in case either is
controverted, the burden of proof is upon them to establish it
(Harry Keeler v. Rodriguez, 4 Phil. 19)." 13 Unless duly authorized,

In the case at bar, Respondent Motorich categorically denies that

it ever authorized Nenita Gruenberg, its treasurer, to sell the
subject parcel of land. 15 Consequently, petitioner had the burden
of proving that Nenita Gruenberg was in fact authorized to
represent and bind Motorich in the transaction. Petitioner failed to
discharge this burden. Its offer of evidence before the trial court
contained no proof of such authority. 16 It has not shown any
provision of said respondent's articles of incorporation, bylaws or
board resolution to prove that Nenita Gruenberg possessed such
power.
That Nenita Gruenberg is the treasurer of Motorich does not free
petitioner from the responsibility of ascertaining the extent of her
authority to represent the corporation. Petitioner cannot assume
that she, by virtue of her position, was authorized to sell the
property of the corporation. Selling is obviously foreign to a
corporate treasurer's function, which generally has been
described as "to receive and keep the funds of the corporation,
and to disburse them in accordance with the authority given him
by the board or the properly authorized officers." 17
Neither was such real estate sale shown to be a normal business
activity of Motorich. The primary purpose of Motorich is marketing,
distribution, export and import in relation to a general
merchandising business. 18 Unmistakably, its treasurer is not
cloaked with actual or apparent authority to buy or sell real
property, an activity which falls way beyond the scope of her
general authority.
Art. 1874 and 1878 of the Civil Code of the Philippines provides:
Art. 1874. When a sale of a piece of land or
any interest therein is through an agent, the
authority of the latter shall be in writing:
otherwise, the sale shall be void.
Art. 1878. Special powers of attorney are
necessary in the following case:
xxx xxx xxx
(5) To enter any contract by which the
ownership of an immovable is transmitted or
acquired either gratuitously or for a valuable
consideration;
xxx xxx xxx.
Petitioner further contends that Respondent Motorich has ratified
said contract of sale because of its "acceptance of benefits," as
evidenced by the receipt issued by Respondent Gruenberg. 19
Petitioner is clutching at straws.
As a general rule, the acts of corporate officers within the scope
of their authority are binding on the corporation. But when these
officers exceed their authority, their actions "cannot bind the
corporation, unless it has ratified such acts or is estopped from
disclaiming them." 20
In this case, there is a clear absence of proof that Motorich ever
authorized Nenita Gruenberg, or made it appear to any third

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CORPORATION LAW | 18

person that she had the authority, to sell its land or to receive the
earnest money. Neither was there any proof that Motorich ratified,
expressly or impliedly, the contract. Petitioner rests its argument
on the receipt which, however, does not prove the fact of
ratification. The document is a hand-written one, not a corporate
receipt, and it bears only Nenita Gruenberg's signature. Certainly,
this document alone does not prove that her acts were authorized
or ratified by Motorich.

Thus, the Court has consistently ruled that "[w]hen the fiction is
used as a means of perpetrating a fraud or an illegal act or as
vehicle for the evasion of an existing obligation, the circumvention
of statutes, the achievement or perfection of a monopoly or
generally the perpetration of knavery or crime, the veil with which
the law covers and isolates the corporation from the members or
stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals." 33

Art. 1318 of the Civil Code lists the requisites of a valid and
perfected contract: "(1) consent of the contracting parties; (2)
object certain which is the subject matter of the contract; (3)
cause of the obligation which is established." As found by the trial
court 21 and affirmed by the Court of Appeals, 22 there is no
evidence that Gruenberg was authorized to enter into the contract
of sale, or that the said contract was ratified by Motorich. This
factual finding of the two courts is binding on this Court. 23 As the
consent of the seller was not obtained, no contract to bind the
obligor was perfected. Therefore, there can be no valid contract of
sale between petitioner and Motorich.

We stress that the corporate fiction should be set aside when it

becomes a shield against liability for fraud, illegality or inequity
committed on third persons. The question of piercing the veil of
corporate fiction is essentially, then, a matter of proof. In the
present case, however, the Court finds no reason to pierce the
corporate veil of Respondent Motorich. Petitioner utterly failed to
establish that said corporation was formed, or that it is operated,
for the purpose of shielding any alleged fraudulent or illegal
activities of its officers or stockholders; or that the said veil was
used to conceal fraud, illegality or inequity at the expense of third
persons like petitioner.

Because Motorich had never given a written authorization to

Respondent Gruenberg to sell its parcel of land, we hold that the
February 14, 1989 Agreement entered into by the latter with
petitioner is void under Article 1874 of the Civil Code. Being
inexistent and void from the beginning, said contract cannot be
ratified. 24

Petitioner claims that Motorich is a close corporation. We rule that

it is not. Section 96 of the Corporation Code defines a close
corporation as follows:

Second
Piercing the Corporate Veil Not Justified

Issue:

Petitioner also argues that the veil of corporate fiction of Motorich

should be pierced, because the latter is a close corporation. Since
"Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg
owned all or almost all or 99.866% to be accurate, of the
subscribed capital stock" 25 of Motorich, petitioner argues that
Gruenberg needed no authorization from the board to enter into
the subject contract. 26 It adds that, being solely owned by the
Spouses Gruenberg, the company can treated as a close
corporation which can be bound by the acts of its principal
stockholder who needs no specific authority. The Court is not
persuaded.
First, petitioner itself concedes having raised the issue belatedly,
27
not having done so during the trial, but only when it filed its surrejoinder before the Court of Appeals. 28 Thus, this Court cannot
entertain said issue at this late stage of the proceedings. It is wellsettled the points of law, theories and arguments not brought to
the attention of the trial court need not be, and ordinarily will not
be, considered by a reviewing court, as they cannot be raised for
the first time on appeal. 29 Allowing petitioner to change horses in
midstream, as it were, is to run roughshod over the basic
principles of fair play, justice and due process.
Second, even if the above mentioned argument were to be
addressed at this time, the Court still finds no reason to uphold it.
True, one of the advantages of a corporate form of business
organization is the limitation of an investor's liability to the amount
of the investment. 30 This feature flows from the legal theory that a
corporate entity is separate and distinct from its stockholders.
However, the statutorily granted privilege of a corporate veil may
be used only for legitimate purposes. 31 On equitable
considerations, the veil can be disregarded when it is utilized as a
shield to commit fraud, illegality or inequity; defeat public
convenience; confuse legitimate issues; or serve as a mere alter
ego or business conduit of a person or an instrumentality, agency
or adjunct of another corporation. 32

Sec. 96. Definition and Applicability of Title.

A close corporation, within the meaning of
this Code, is one whose articles of
incorporation provide that: (1) All of the
corporation's issued stock of all classes,
exclusive of treasury shares, shall be held of
record by not more than a specified number
of persons, not exceeding twenty (20); (2) All
of the issued stock of all classes shall be
subject to one or more specified restrictions
on transfer permitted by this Title; and (3) The
corporation shall not list in any stock
exchange or make any public offering of any
of its stock of any class. Notwithstanding the
foregoing, a corporation shall be deemed not
a close corporation when at least two-thirds
(2/3) of its voting stock or voting rights is
owned or controlled by another corporation
which is not a close corporation within the
meaning of this Code. . . . .
The articles of incorporation 34 of Motorich Sales Corporation does
not contain any provision stating that (1) the number of
stockholders shall not exceed 20, or (2) a preemption of shares is
restricted in favor of any stockholder or of the corporation, or (3)
listing its stocks in any stock exchange or making a public offering
of such stocks is prohibited. From its articles, it is clear that
Respondent Motorich is not a close corporation. 35 Motorich does
not become one either, just because Spouses Reynaldo and
Nenita Gruenberg owned 99.866% of its subscribed capital stock.
The "[m]ere ownership by a single stockholder or by another
corporation of all or capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate
personalities." 36 So, too, a narrow distribution of ownership does
not, by itself, make a close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of
Appeals 37 wherein the Court ruled that ". . . petitioner corporation
is classified as a close corporation and, consequently, a board
resolution authorizing the sale or mortgage of the subject property
is not necessary to bind the corporation for the action of its
president." 38 But the factual milieu in Dulay is not on all fours with

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CORPORATION LAW | 19

the present case. In Dulay, the sale of real property was

contracted by the president of a close corporation with the
knowledge and acquiescence of its board of directors. 39 In the
present case, Motorich is not a close corporation, as previously
discussed, and the agreement was entered into by the corporate
treasurer without the knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where
"an action by a director, who singly is the controlling stockholder,
may be considered as a binding corporate act and a board action
as nothing more than a mere formality." 40 The present case,
however, is not one of them.
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg
own "almost 99.866%" of Respondent Motorich. 41 Since Nenita is
not the sole controlling stockholder of Motorich, the
aforementioned exception does not apply. Granting arguendo that
the corporate veil of Motorich is to be disregarded, the subject
parcel of land would then be treated as conjugal property of
Spouses Gruenberg, because the same was acquired during their
marriage. There being no indication that said spouses, who
appear to have been married before the effectivity of the Family
Code, have agreed to a different property regime, their property
relations would be governed by conjugal partnership of gains. 42
As a consequence, Nenita Gruenberg could not have effected a
sale of the subject lot because "[t]here is no co-ownership
between the spouses in the properties of the conjugal partnership
of gains. Hence, neither spouse can alienate in favor of another
his or interest in the partnership or in any property belonging to it;
neither spouse can ask for a partition of the properties before the
partnership has been legally dissolved." 43
Assuming further, for the sake of argument, that the spouses'
property regime is the absolute community of property, the sale
would still be invalid. Under this regime, "alienation of community
property must have the written consent of the other spouse or he
authority of the court without which the disposition or
encumbrance is void." 44 Both requirements are manifestly absent
in the instant case.
Third Issue: Challenged Portion of TSN Immaterial
Petitioner calls our attention to the following excerpt of the
transcript of stenographic notes (TSN):
Q Did you ever represent to Mr. Co that you were
authorized by the corporation to sell the
property?
A Yes, sir. 45
Petitioner claims that the answer "Yes" was crossed out, and, in
its place was written a "No" with an initial scribbled above it. 46
This, however, is insufficient to prove that Nenita Gruenberg was
authorized to represent Respondent Motorich in the sale of its
immovable property. Said excerpt be understood in the context of
her whole testimony. During her cross-examination. Respondent
Gruenberg testified:
Q So, you signed in your capacity as the
treasurer?
[A] Yes, sir.

Q Even then you kn[e]w all along that you [were]

not authorized?
A Yes, sir.
Q You stated on direct examination that you did
not represent that you were authorized to sell the
property?
A Yes, sir.
Q But you also did not say that you were not
authorized to sell the property, you did not tell
that to Mr. Co, is that correct?
A That was not asked of me.
Q Yes, just answer it.
A I just told them that I was the treasurer of the
corporation and it [was] also the president who
[was] also authorized to sign on behalf of the
corporation.
Q You did not say that you were not authorized
nor did you say that you were authorized?
A Mr. Co was very interested to purchase the
property and he offered to put up a P100,000.00
earnest money at that time. That was our first
meeting. 47
Clearly then, Nenita Gruenberg did not testify that Motorich had
authorized her to sell its property. On the other hand, her
testimony demonstrates that the president of Petitioner
Corporation, in his great desire to buy the property, threw caution
to the wind by offering and paying the earnest money without first
verifying Gruenberg's authority to sell the lot.
Fourth Issue: Damages and Attorney's Fees
Finally, petitioner prays for damages and attorney's fees, alleging
that "[i]n an utter display of malice and bad faith, respondents
attempted and succeeded in impressing on the trial court and
[the] Court of Appeals that Gruenberg did not represent herself as
authorized by Respondent Motorich despite the receipt issued by
the former specifically indicating that she was signing on behalf of
Motorich Sales Corporation. Respondent Motorich likewise acted
in bad faith when it claimed it did not authorize Respondent
Gruenberg and that the contract [was] not binding, [insofar] as it
[was] concerned, despite receipt and enjoyment of the proceeds
of Gruenberg's act." 48 Assuming that Respondent Motorich was
not a party to the alleged fraud, petitioner maintains that
Respondent Gruenberg should be held liable because she "acted
fraudulently and in bad faith [in] representing herself as duly
authorized by [R]espondent [C]orporation." 49
As already stated, we sustain the findings of both the trial and the
appellate courts that the foregoing allegations lack factual bases.
Hence, an award of damages or attorney's fees cannot be
justified. The amount paid as "earnest money" was not proven to
have redounded to the benefit of Respondent Motorich. Petitioner
claims that said amount was deposited to the account of

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CORPORATION LAW | 20

Respondent Motorich, because "it was deposited with the account

of Aren Commercial c/o Motorich Sales Corporation." 50
Respondent Gruenberg, however, disputes the allegations of
petitioner. She testified as follows:
Q You voluntarily accepted the P100,000.00, as a
matter of fact, that was encashed, the check was
encashed.
A Yes. sir, the check was paid in my name and I
deposit[ed] it.
Q In your account?
A Yes, sir. 51
In any event, Gruenberg offered to return the amount to
petitioner ". . . since the sale did not push through." 52
Moreover, we note that Andres Co is not a neophyte in the world
of corporate business. He has been the president of Petitioner
Corporation for more than ten years and has also served as chief
executive of two other corporate entities. 53 Co cannot feign
ignorance of the scope of the authority of a corporate treasurer
such as Gruenberg. Neither can he be oblivious to his duty to
ascertain the scope of Gruenberg's authorization to enter into a
contract to sell a parcel of land belonging to Motorich.
Indeed, petitioner's claim of fraud and bad faith is unsubstantiated
and fails to persuade the Court. Indubitably, petitioner appears to
be the victim of its own officer's negligence in entering into a
contract with and paying an unauthorized officer of another
corporation.
As correctly ruled by the Court of Appeals, however, Nenita
Gruenberg should be ordered to return to petitioner the amount
she received as earnest money, as "no one shall enrich himself at
the expense of another." 54 a principle embodied in Article 2154 of
Civil Code. 55 Although there was no binding relation between
them, petitioner paid Gruenberg on the mistaken belief that she
had the authority to sell the property of Motorich. 56 Article 2155 of
Civil Code provides that "[p]ayment by reason of a mistake in the
contruction or application of a difficult question of law may come
within the scope of the preceding article."
WHEREFORE, the petition is hereby DENIED and the assailed
Decision is AFFIRMED.
SO ORDERED.
Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.

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CORPORATION LAW | 21

EN BANC
[G.R. Nos. 84132-33 : December 10, 1990.]
192 SCRA 257
NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX,
INC., Petitioners, vs. PHILIPPINE VETERANS BANK, THE EXOFFICIO SHERIFF and GODOFREDO QUILING, in his
capacity as Deputy Sheriff of Calamba, Laguna,
Respondents.

DECISION

CRUZ, J.:

This case involves the constitutionality of a presidential decree

which, like all other issuances of President Marcos during his
regime, was at that time regarded as sacrosanct. It is only now, in
a freer atmosphere, that his acts are being tested by the
touchstone of the fundamental law that even then was supposed
to limit presidential action.: rd
The particular enactment in question is Pres. Decree No. 1717,
which ordered the rehabilitation of the Agrix Group of Companies
to be administered mainly by the National Development
Company. The law outlined the procedure for filing claims against
the Agrix companies and created a Claims Committee to process
these claims. Especially relevant to this case, and noted at the
outset, is Sec. 4(1) thereof providing that "all mortgages and other
liens presently attaching to any of the assets of the dissolved
corporations are hereby extinguished."
Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of
private respondent Philippine Veterans Bank a real estate
mortgage dated July 7, 1978, over three (3) parcels of land
situated in Los Baos, Laguna. During the existence of the
mortgage, AGRIX went bankrupt. It was for the expressed
purpose of salvaging this and the other Agrix companies that the
aforementioned decree was issued by President Marcos.
Pursuant thereto, the private respondent filed a claim with the
AGRIX Claims Committee for the payment of its loan credit. In the
meantime, the New Agrix, Inc. and the National Development
Company, petitioners herein, invoking Sec. 4 (1) of the decree,
filed a petition with the Regional Trial Court of Calamba, Laguna,
for the cancellation of the mortgage lien in favor of the private
respondent. For its part, the private respondent took steps to
extrajudicially foreclose the mortgage, prompting the petitioners to
file a second case with the same court to stop the foreclosure.
The two cases were consolidated.
After the submission by the parties of their respective pleadings,
the trial court rendered the impugned decision. Judge Francisco
Ma. Guerrero annulled not only the challenged provision, viz.,
Sec. 4 (1), but the entire Pres. Decree No. 1717 on the grounds
that: (1) the presidential exercise of legislative power was a
violation of the principle of separation of powers; (2) the law
impaired the obligation of contracts; and (3) the decree violated
the equal protection clause. The motion for reconsideration of this
decision having been denied, the present petition was filed.: rd
The petition was originally assigned to the Third Division of this
Court but because of the constitutional questions involved it was
transferred to the Court en banc. On August 30, 1988, the Court
granted the petitioner's prayer for a temporary restraining order
and instructed the respondents to cease and desist from
conducting a public auction sale of the lands in question. After the

Solicitor General and the private respondent had filed their

comments and the petitioners their reply, the Court gave due
course to the petition and ordered the parties to file simultaneous
memoranda. Upon compliance by the parties, the case was
deemed submitted.
The petitioners contend that the private respondent is now
estopped from contesting the validity of the decree. In support of
this contention, it cites the recent case of Mendoza v. Agrix
Marketing, Inc., 1 where the constitutionality of Pres. Decree No.
1717 was also raised but not resolved. The Court, after noting
that the petitioners had already filed their claims with the AGRIX
Claims Committee created by the decree, had simply dismissed
the petition on the ground of estoppel.
The petitioners stress that in the case at bar the private
respondent also invoked the provisions of Pres. Decree No. 1717
by filing a claim with the AGRIX Claims Committee. Failing to get
results, it sought to foreclose the real estate mortgage executed
by AGRIX in its favor, which had been extinguished by the decree.
It was only when the petitioners challenged the foreclosure on the
basis of Sec. 4 (1) of the decree, that the private respondent
attacked the validity of the provision. At that stage, however,
consistent with Mendoza, the private respondent was already
estopped from questioning the constitutionality of the decree.
The Court does not agree that the principle of estoppel is
applicable.
It is not denied that the private respondent did file a claim with the
AGRIX Claims Committee pursuant to this decree. It must be
noted, however, that this was done in 1980, when President
Marcos was the absolute ruler of this country and his decrees
were the absolute law. Any judicial challenge to them would have
been futile, not to say foolhardy. The private respondent, no less
than the rest of the nation, was aware of that reality and knew it
had no choice under the circumstances but to conform.: nad
It is true that there were a few venturesome souls who dared to
question the dictator's decisions before the courts of justice then.
The record will show, however, that not a single act or issuance of
President Marcos was ever declared unconstitutional, not even by
the highest court, as long as he was in power. To rule now that the
private respondent is estopped for having abided with the decree
instead of boldly assailing it is to close our eyes to a cynical fact
of life during that repressive time.
This case must be distinguished from Mendoza, where the
petitioners, after filing their claims with the AGRIX Claims
Committee, received in settlement thereof shares of stock valued
at P40,000.00 without protest or reservation. The herein private
respondent has not been paid a single centavo on its claim, which
was kept pending for more than seven years for alleged lack of
supporting papers. Significantly, the validity of that claim was not
questioned by the petitioner when it sought to restrain the
extrajudicial foreclosure of the mortgage by the private
respondent. The petitioner limited itself to the argument that the
private respondent was estopped from questioning the decree
because of its earlier compliance with its provisions.
Independently of these observations, there is the consideration
that an affront to the Constitution cannot be allowed to continue
existing simply because of procedural inhibitions that exalt form
over substance.
The Court is especially disturbed by Section 4(1) of the decree,
quoted above, extinguishing all mortgages and other liens
attaching to the assets of AGRIX. It also notes, with equal
concern, the restriction in Subsection (ii) thereof that all
"unsecured obligations shall not bear interest" and in Subsection
(iii) that "all accrued interests, penalties or charges as of date
hereof pertaining to the obligations, whether secured or
unsecured, shall not be recognized."

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CORPORATION LAW | 22

These provisions must be read with the Bill of Rights, where it is

clearly provided in Section 1 that "no person shall be deprived of
life, liberty or property without due course of law nor shall any
person be denied the equal protection of the law" and in Section
10 that "no law impairing the obligation of contracts shall be
passed."
In defending the decree, the petitioners argue that property rights,
like all rights, are subject to regulation under the police power for
the promotion of the common welfare. The contention is that this
inherent power of the state may be exercised at any time for this
purpose so long as the taking of the property right, even if based
on contract, is done with due process of law.
This argument is an over-simplification of the problem before us.
The police power is not a panacea for all constitutional maladies.
Neither does its mere invocation conjure an instant and automatic
justification for every act of the government depriving a person of
his life, liberty or property.
A legislative act based on the police power requires the
concurrence of a lawful subject and a lawful method. In more
familiar words, a) the interests of the public generally, as
distinguished from those of a particular class, should justify the
interference of the state; and b) the means employed are
reasonably necessary for the accomplishment of the purpose and
not unduly oppressive upon individuals. 2

respective claims. In this respect, all of them are considered

unsecured creditors. The only concession given to the secured
creditors is that their loans are allowed to earn interest from the
date of the decree, but that still does not justify the cancellation of
the interests earned before that date. Such interests, whether due
to the secured or the unsecured creditors, are all extinguished by
the decree. Even assuming such cancellation to be valid, we still
cannot see why all kinds of creditors, regardless of security, are
treated alike.
Under the equal protection clause, all persons or things similarly
situated must be treated alike, both in the privileges conferred and
the obligations imposed. Conversely, all persons or things
differently situated should be treated differently. In the case at bar,
persons differently situated are similarly treated, in disregard of
the principle that there should be equality only among equals.nad
One may also well wonder why AGRIX was singled out for
government help, among other corporations where the
stockholders or investors were also swindled. It is not clear why
other companies entitled to similar concern were not similarly
treated. And surely, the stockholders of the private respondent,
whose mortgage lien had been cancelled and legitimate claims to
accrued interests rejected, were no less deserving of protection,
which they did not get. The decree operated, to use the words of
a celebrated case, 3 "with an evil eye and an uneven hand."

Applying these criteria to the case at bar, the Court finds first of all
that the interests of the public are not sufficiently involved to
warrant the interference of the government with the private
contracts of AGRIX. The decree speaks vaguely of the "public,
particularly the small investors," who would be prejudiced if the
corporation were not to be assisted. However, the record does not
state how many there are of such investors, and who they are,
and why they are being preferred to the private respondent and
other creditors of AGRIX with vested property rights.:-cralaw

On top of all this, New Agrix, Inc. was created by special decree
notwithstanding the provision of Article XIV, Section 4 of the 1973
Constitution, then in force, that:

The public interest supposedly involved is not identified or

explained. It has not been shown that by the creation of the New
Agrix, Inc. and the extinction of the property rights of the creditors
of AGRIX, the interests of the public as a whole, as distinguished
from those of a particular class, would be promoted or protected.
The indispensable link to the welfare of the greater number has
not been established. On the contrary, it would appear that the
decree was issued only to favor a special group of investors who,
for reasons not given, have been preferred to the legitimate
creditors of AGRIX.

The new corporation is neither owned nor controlled by the

government. The National Development Corporation was merely
required to extend a loan of not more than P10,000,000.00 to
New Agrix, Inc. Pending payment thereof, NDC would undertake
the management of the corporation, but with the obligation of
making periodic reports to the Agrix board of directors. After
payment of the loan, the said board can then appoint its own
management. The stocks of the new corporation are to be issued
to the old investors and stockholders of AGRIX upon proof of their
claims against the abolished corporation. They shall then be the
owners of the new corporation. New Agrix, Inc. is entirely private
and so should have been organized under the Corporation Law in
accordance with the above-cited constitutional provision.

Assuming there is a valid public interest involved, the Court still

finds that the means employed to rehabilitate AGRIX fall far short
of the requirement that they shall not be unduly oppressive. The
oppressiveness is patent on the face of the decree. The right to
property in all mortgages, liens, interests, penalties and charges
owing to the creditors of AGRIX is arbitrarily destroyed. No
consideration is paid for the extinction of the mortgage rights. The
accrued interests and other charges are simply rejected by the
decree. The right to property is dissolved by legislative fiat without
regard to the private interest violated and, worse, in favor of
another private interest.
A mortgage lien is a property right derived from contract and so
comes under the protection of the Bill of Rights. So do interests
on loans, as well as penalties and charges, which are also vested
rights once they accrue. Private property cannot simply be taken
by law from one person and given to another without
compensation and any known public purpose. This is plain
arbitrariness and is not permitted under the Constitution.
And not only is there arbitrary taking, there is discrimination as
well. In extinguishing the mortgage and other liens, the decree
lumps the secured creditors with the unsecured creditors and
places them on the same level in the prosecution of their

SEC. 4. The Batasang Pambansa shall not, except by general

law, provide for the formation, organization, or regulation of
private corporations, unless such corporations are owned or
controlled by the Government or any subdivision or
instrumentality thereof. 4

The Court also feels that the decree impairs the obligation of the
contract between AGRIX and the private respondent without
justification. While it is true that the police power is superior to the
impairment clause, the principle will apply only where the contract
is so related to the public welfare that it will be considered
congenitally susceptible to change by the legislature in the
interest of the greater number. 5 Most present-day contracts are
of that nature. But as already observed, the contracts of loan and
mortgage executed by AGRIX are purely private transactions and
have not been shown to be affected with public interest. There
was therefore no warrant to amend their provisions and deprive
the private respondent of its vested property rights.
It is worth noting that only recently in the case of the Development
Bank of the Philippines v. NLRC, 6 we sustained the preference in
payment of a mortgage creditor as against the argument that the
claims of laborers should take precedence over all other claims,
including those of the government. In arriving at this ruling, the
Court recognized the mortgage lien as a property right protected
by the due process and contract clauses notwithstanding the

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CORPORATION LAW | 23

argument that the amendment in Section 110 of the Labor Code

was a proper exercise of the police power.: nad
The Court reaffirms and applies that ruling in the case at bar.
Our finding, in sum, is that Pres. Decree No. 1717 is an invalid
exercise of the police power, not being in conformity with the
traditional requirements of a lawful subject and a lawful method.
The extinction of the mortgage and other liens and of the interest
and other charges pertaining to the legitimate creditors of AGRIX
constitutes taking without due process of law, and this is
compounded by the reduction of the secured creditors to the
category of unsecured creditors in violation of the equal protection
clause. Moreover, the new corporation, being neither owned nor
controlled by the Government, should have been created only by
general and not special law. And insofar as the decree also
interferes with purely private agreements without any
demonstrated connection with the public interest, there is likewise
an impairment of the obligation of the contract.
With the above pronouncements, we feel there is no more need to
rule on the authority of President Marcos to promulgate Pres.
Decree No. 1717 under Amendment No. 6 of the 1973
Constitution. Even if he had such authority, the decree must fall
just the same because of its violation of the Bill of Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree No.
1717 is declared UNCONSTITUTIONAL. The temporary
restraining order dated August 30, 1988, is LIFTED. Costs against
the petitioners.- nad
SO ORDERED.

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Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 15574

September 17, 1919

SMITH, BELL & COMPANY (LTD.), petitioner,

vs.
JOAQUIN NATIVIDAD, Collector of Customs of the port of
Cebu, respondent.
Ross and Lawrence for petitioner.
Attorney-General Paredes for respondent.
SYLLABUS
1. CONSTITUTIONAL LAW; PHILIPPINE BILL OF RIGHTS;
CONSTRUCTION. The guaranties extended by the Congress
of the United States to the Philippine Islands have been used in
the same sense as like provisions found in the United States
Constitution.
2. ID.; ID.; FOURTEENTH AMENDMENT TO THE UNITED
STATES CONSTITUTION; DUE PROCESS OF LAW AND
EQUAL PROTECTION OF THE LAWS; ALIENS. The
guaranties of the Fourteenth Amendment and so of the first
paragraph of the Philippine Bill of Rights are universal in their
application to all persons within the territorial jurisdiction, without
regard to any differences of race, color, or nationality.
3. ID.; ID.; ID.; ID.; ID. The word "person" found in the
Fourteenth Amendment and in the first sentence of the first
paragraph of the Philippine Bill of Rights includes aliens.
4. ID.; ID.; ID.; ID.; ID. Private corporations are "persons"
within the scope of the guaranties in so far as their property is
concerned.
5. ID.; ID.; ID.; ID.; ID. Statutes which have attempted
arbitrarily to forbid aliens to engage in any kind of business to
earn their living have been held unconstitutional, while other
statutes denying certain rights to aliens have been held
constitutional
6. ID.; ID.; ID.; ID.; ID.; POLICE POWER. Neither the
Fourteenth Amendment to the United States Constitution, broad
and comprehensive as it is, nor any other amendment, "was
designed to interfere with the power of the State, sometimes
termed its police power, to prescribe regulations to promote the
health, peace, morals, education and good order of the people,
and to legislate so as to increase the industries of the State,
develop its resources and add to its wealth and prosperity. From
the very necessities of society, legislation of a special character,
having these objects in view, must often be had in certain
districts." (Barbier v. Connolly [1884], 113 U. S., 27; New Orleans
Gas Co. v. Louisiana Light Co. [1885], 115 U. S., 650.)
7. ID.; ID.; ID.; ID.; ID.; ID. None of the provisions of the
Philippine Organic Law could have had the effect of denying to
the Government of the Philippine Islands, acting through its
Legislature, the right to exercise that most essential, insistent, and
illimitable of powers, the sovereign police power, in the promotion
of the general welfare and the public interest.
8. ID., ID.; ID.; ID.; ID.; ID. The public domain or the common

property or resources of the people of the State may be so

regulated or distributed as to limit the use to its citizens.
9. ID.; ID.; ID.; ID.; ID.; ID. The limitation of employment in the
construction of public works by, or for, a state or a municipality to
citizens of the United States or of a State is permitted.
10. ID.; ID.; ID.; ID.; ID.; ID. Our local experience and our
peculiar local conditions, often of controlling effect, have caused
the executive branch of the Government of the Philippine Islands,
always later with the sanction of the judicial branch, to take a firm
stand with reference to the presence of undesirable foreigners.
The Government has thus assumed to act for the all sufficient and
primitive reasons of the benefit and protection of its own citizens
and of the self-preservation and integrity of its dominion.
11. ID.; ID.; ID.; ID.; ID.; ID. Common carriers which, in the
Philippines as in the United States and other countries, are
affected with a public interest, can only be permitted to use the
public waters, deemed a part of the national domain and open to
public use, as a privilege, and under such conditions as to the
Legislature may seem wise.
12. ID.; CONSTRUCTION; PUBLIC POLICY. The judiciary,
alive to the dictates of the national welfare, can properly incline
the scales of their decisions in favor of that solution which will
most effectively promote the public policy.
13. ID.; ID., PRESUMPTION. All the presumption is in favor of
the constitutionality of the law, and without good and strong
reasons a court should not attempt to nullify the action of the
Legislature.
14. ID.; ID.; ID. That is the true construction which will best
carry legislative intention into effect.
15. ID.; COMMERCE; UNITED STATES COASTWISE TRADE.
The power to regulate commerce, expressly delegated to the
Congress by the Constitution, includes the power to nationalize
ships built and owned in the United States by registries and
enrollments and the recording of the muniments of title of
American vessels.
16. ID.; ID.; ID. Under the Acts of Congress of December 31,
1792, and February 18, 1793 (1 Stat. at L., 287, 305) in case of
alienation to a foreigner, all the privileges .of an American bottom
were ipso facto forfeited. No vessel in which a foreigner was
directly or indirectly interested could lawfully be registered as a
vessel of the United States.
17. ID.; ID.; ID. The Act of Congress of May 28, 1895 (29 Stat.
at L., 188) extended the privileges of registry from vessels wholly
owned by a citizen or citizens of the United States to corporations
created under the laws of any of the states thereof. This law made
it possible for a domestic corporation to obtain the registry or
enrollment of its vessels even though some stock of the
corporation was owned by aliens.
18. ID.; ID.; PHILIPPINE COASTWISE TRADE; ACT No. 2761,
VALIDITY. The history of the different laws which have
concerned the Philippine coastwise trade is set out in the opinion.
The last Act on the subject, No. 2761, has returned to the
restrictive idea of the original Customs Administrative Act which in
turn was merely a reflection of the statutory language of the first
American Congress.
19. ID.; ID.; ID.; ID. Without any subterfuge, the apparent
purpose of the Philippine Legislature is seen to be to enact an
anti-alien shipping act. The ultimate purpose of the Legislature is
to encourage Philippine ship-building.

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CORPORATION LAW | 25

20. ID.; ID.; ID.; ID. The Philippine Legislature made up entirely
of Filipinos, representing the mandate of the Filipino people and
the guardian of their rights, acting under practically autonomous
powers, and imbued with a strong sense of Philippinism, has
desired for these Islands safety from foreign interlopers, the use
of the common property exclusively by its citizens and the citizens
of the United States, and protection for the common good of the
people.
21. ID.; ID.; ID.; ID. Act No. 2761 of the Philippine Legislature,
limiting certificates of the Philippine registry to vessels of domestic
ownership vested in some one or more of the following classes of
persons: (a) citizens or native inhabitants of the Philippine
Islands; (b) citizens of the United States residing in the Philippine
Islands; (c) any corporation or company composed wholly of
citizens of the Philippine Islands or of the United States or both, is
authorized by the Act of Congress of April 29, 1908, with its
specific delegation of authority to the Government of the
Philippine Islands to regulate the transportation of merchandise
and passengers between ports or places therein, and by the grant
by the Act of Congress of August 29, 1916, of general legislative
power to the Philippine Legislature.
22. ID.; ID, ID.; ID. While the plaintiff, a corporation having
alien stockholders, is entitled to the protection afforded by the due
process of law and equal protection of the laws clause of the
Philippine Bill of Rights, yet Act No. 2761, in denying to
corporations such as the plaintiff the right to register vessels in
the Philippine coastwise trade, does not belong to that vicious
species of class legislation which must always be condemned, but
falls within authorized exceptions, notably, within the purview of
the police power.
23. ID.; ID.; ID.; ID. Act No. 2761 does not violate the
provisions of paragraph 1 of section 3 of the Act of Congress of
August 29, 1916, providing "that no law shall be enacted in said
Islands which shall deprive any person of life, liberty, or property
without due process of law, or deny to any person therein the
equal protection of the laws."cralaw virtua1aw library
24. ID.; ID.; ID.; ID. Act No. 2761 is held to be valid and
constitutional.
MALCOLM, J.:
A writ of mandamus is prayed for by Smith, Bell & Co. (Ltd.),
against Joaquin Natividad, Collector of Customs of the port of
Cebu, Philippine Islands, to compel him to issue a certificate of
Philippine registry to the petitioner for its motor vessel Bato. The
Attorney-General, acting as counsel for respondent, demurs to
the petition on the general ground that it does not state facts
sufficient to constitute a cause of action. While the facts are thus
admitted, and while, moreover, the pertinent provisions of law are
clear and understandable, and interpretative American
jurisprudence is found in abundance, yet the issue submitted is
not lightly to be resolved. The question, flatly presented, is,
whether Act. No. 2761 of the Philippine Legislature is valid or,
more directly stated, whether the Government of the Philippine
Islands, through its Legislature, can deny the registry of vessels in
its coastwise trade to corporations having alien stockholders.
FACTS.
Smith, Bell & Co., (Ltd.), is a corporation organized and existing
under the laws of the Philippine Islands. A majority of its
stockholders are British subjects. It is the owner of a motor vessel
known as the Bato built for it in the Philippine Islands in 1916, of
more than fifteen tons gross The Bato was brought to Cebu in the

present year for the purpose of transporting plaintiff's

merchandise between ports in the Islands. Application was made
at Cebu, the home port of the vessel, to the Collector of Customs
for a certificate of Philippine registry. The Collector refused to
issue the certificate, giving as his reason that all the stockholders
of Smith, Bell & Co., Ltd., were not citizens either of the United
States or of the Philippine Islands. The instant action is the result.
LAW.
The Act of Congress of April 29, 1908, repealing the Shipping Act
of April 30, 1906 but reenacting a portion of section 3 of this Law,
and still in force, provides in its section 1:
That until Congress shall have authorized the registry
as vessels of the United States of vessels owned in the
Philippine Islands, the Government of the Philippine
Islands is hereby authorized to adopt, from time to time,
and enforce regulations governing the transportation of
merchandise and passengers between ports or places
in the Philippine Archipelago. (35 Stat. at L., 70; Section
3912, U. S. Comp Stat. [1916]; 7 Pub. Laws, 364.)
The Act of Congress of August 29, 1916, commonly known as the
Jones Law, still in force, provides in section 3, (first paragraph,
first sentence), 6, 7, 8, 10, and 31, as follows.
SEC. 3. That no law shall be enacted in said Islands
which shall deprive any person of life, liberty, or
property without due process of law, or deny to any
person therein the equal protection of the laws. . . .
SEC. 6. That the laws now in force in the Philippines
shall continue in force and effect, except as altered,
amended, or modified herein, until altered, amended, or
repealed by the legislative authority herein provided or
by Act of Congress of the United States.
SEC. 7. That the legislative authority herein provided
shall have power, when not inconsistent with this Act,
by due enactment to amend, alter modify, or repeal any
law, civil or criminal, continued in force by this Act as it
may from time to time see fit
This power shall specifically extend with the limitation
herein provided as to the tariff to all laws relating to
revenue provided as to the tariff to all laws relating to
revenue and taxation in effect in the Philippines.
SEC. 8. That general legislative power, except as
otherwise herein provided, is hereby granted to the
Philippine Legislature, authorized by this Act.
SEC. 10. That while this Act provides that the Philippine
government shall have the authority to enact a tariff law
the trade relations between the islands and the United
States shall continue to be governed exclusively by
laws of the Congress of the United States: Provided,
That tariff acts or acts amendatory to the tariff of the
Philippine Islands shall not become law until they shall
receive the approval of the President of the United
States, nor shall any act of the Philippine Legislature
affecting immigration or the currency or coinage laws of
the Philippines become a law until it has been approved
by the President of the United States: Provided further,

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CORPORATION LAW | 26

That the President shall approve or disapprove any act

mentioned in the foregoing proviso within six months
from and after its enactment and submission for his
approval, and if not disapproved within such time it shall
become a law the same as if it had been specifically
approved.

master or one mate and one engineer who are not

citizens of the United States or of the Philippine Islands,
even if they hold licenses under section one thousand
one hundred and ninety-nine hereof. No other person
who is not a citizen of the United States or of the
Philippine Islands shall be an officer or a member of the
crew of such vessel. Any such vessel which fails to
comply with the terms of this section shall be required
to pay an additional tonnage tax of fifty centavos per
net ton per month during the continuance of said failure.

SEC. 31. That all laws or parts of laws applicable to the

Philippines not in conflict with any of the provisions of
this Act are hereby continued in force and effect." (39
Stat at L., 546.)
ISSUES.
On February 23, 1918, the Philippine Legislature enacted Act No.
2761. The first section of this law amended section 1172 of the
Administrative Code to read as follows:
SEC. 1172. Certificate of Philippine register. Upon
registration of a vessel of domestic ownership, and of
more than fifteen tons gross, a certificate of Philippine
register shall be issued for it. If the vessel is of domestic
ownership and of fifteen tons gross or less, the taking of
the certificate of Philippine register shall be optional
with the owner.
"Domestic ownership," as used in this section, means
ownership vested in some one or more of the following
classes of persons: (a) Citizens or native inhabitants of
the Philippine Islands; (b) citizens of the United States
residing in the Philippine Islands; (c) any corporation or
company composed wholly of citizens of the Philippine
Islands or of the United States or of both, created under
the laws of the United States, or of any State thereof, or
of thereof, or the managing agent or master of the
vessel resides in the Philippine Islands
Any vessel of more than fifteen gross tons which on
February eighth, nineteen hundred and eighteen, had a
certificate of Philippine register under existing law, shall
likewise be deemed a vessel of domestic ownership so
long as there shall not be any change in the ownership
thereof nor any transfer of stock of the companies or
corporations owning such vessel to person not included
under the last preceding paragraph.
Sections 2 and 3 of Act No. 2761 amended sections 1176 and
1202 of the Administrative Code to read as follows:
SEC. 1176. Investigation into character of vessel. No
application for a certificate of Philippine register shall
be approved until the collector of customs is satisfied
from an inspection of the vessel that it is engaged or
destined to be engaged in legitimate trade and that it is
of domestic ownership as such ownership is defined in
section eleven hundred and seventy-two of this Code.
The collector of customs may at any time inspect a
vessel or examine its owner, master, crew, or
passengers in order to ascertain whether the vessel is
engaged in legitimate trade and is entitled to have or
retain the certificate of Philippine register.
SEC. 1202. Limiting number of foreign officers and
engineers on board vessels. No Philippine vessel
operating in the coastwise trade or on the high seas
shall be permitted to have on board more than one

Predicated on these facts and provisions of law, the issues as

above stated recur, namely, whether Act No 2761 of the Philippine
Legislature is valid in whole or in part whether the Government
of the Philippine Islands, through its Legislature, can deny the
registry of vessel in its coastwise trade to corporations having
alien stockholders .
OPINION.
1. Considered from a positive standpoint, there can exist no
measure of doubt as to the power of the Philippine Legislature to
enact Act No. 2761. The Act of Congress of April 29, 1908, with its
specific delegation of authority to the Government of the
Philippine Islands to regulate the transportation of merchandise
and passengers between ports or places therein, the liberal
construction given to the provisions of the Philippine Bill, the Act
of Congress of July 1, 1902, by the courts, and the grant by the
Act of Congress of August 29, 1916, of general legislative power
to the Philippine Legislature, are certainly superabundant
authority for such a law. While the Act of the local legislature may
in a way be inconsistent with the Act of Congress regulating the
coasting trade of the Continental United States, yet the general
rule that only such laws of the United States have force in the
Philippines as are expressly extended thereto, and the
abnegation of power by Congress in favor of the Philippine
Islands would leave no starting point for convincing argument. As
a matter of fact, counsel for petitioner does not assail legislative
action from this direction (See U. S. vs. Bull [1910], 15 Phil., 7;
Sinnot vs. Davenport [1859] 22 How., 227.)
2. It is from the negative, prohibitory standpoint that counsel
argues against the constitutionality of Act No. 2761. The first
paragraph of the Philippine Bill of Rights of the Philippine Bill,
repeated again in the first paragraph of the Philippine Bill of
Rights as set forth in the Jones Law, provides "That no law shall
be enacted in said Islands which shall deprive any person of life,
liberty, or property without due process of law, or deny to any
person therein the equal protection of the laws." Counsel says
that Act No. 2761 denies to Smith, Bell & Co., Ltd., the equal
protection of the laws because it, in effect, prohibits the
corporation from owning vessels, and because classification of
corporations based on the citizenship of one or more of their
stockholders is capricious, and that Act No. 2761 deprives the
corporation of its properly without due process of law because by
the passage of the law company was automatically deprived of
every beneficial attribute of ownership in the Bato and left with the
naked title to a boat it could not use .
The guaranties extended by the Congress of the United States to
the Philippine Islands have been used in the same sense as like
provisions found in the United States Constitution. While the "due
process of law and equal protection of the laws" clause of the
Philippine Bill of Rights is couched in slightly different words than
the corresponding clause of the Fourteenth Amendment to the

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CORPORATION LAW | 27

United States Constitution, the first should be interpreted and

given the same force and effect as the latter. (Kepner vs. U.S.
[1904], 195 U. S., 100; Sierra vs. Mortiga [1907], 204 U. S.,.470;
U. S. vs. Bull [1910], 15 Phil., 7.) The meaning of the Fourteenth
Amendment has been announced in classic decisions of the
United States Supreme Court. Even at the expense of restating
what is so well known, these basic principles must again be set
down in order to serve as the basis of this decision.
The guaranties of the Fourteenth Amendment and so of the first
paragraph of the Philippine Bill of Rights, are universal in their
application to all person within the territorial jurisdiction, without
regard to any differences of race, color, or nationality. The word
"person" includes aliens. (Yick Wo vs. Hopkins [1886], 118 U. S.,
356; Truax vs. Raich [1915], 239 U. S., 33.) Private corporations,
likewise, are "persons" within the scope of the guaranties in so far
as their property is concerned. (Santa Clara County vs. Southern
Pac. R. R. Co. [1886], 118.U. S., 394; Pembina Mining Co. vs.
Pennsylvania [1888],.125 U. S., 181 Covington & L. Turnpike
Road Co. vs. Sandford [1896], 164 U. S., 578.) Classification with
the end in view of providing diversity of treatment may be made
among corporations, but must be based upon some reasonable
ground and not be a mere arbitrary selection (Gulf, Colorado &
Santa Fe Railway Co. vs. Ellis [1897],.165 U. S., 150.) Examples
of laws held unconstitutional because of unlawful discrimination
against aliens could be cited. Generally, these decisions relate to
statutes which had attempted arbitrarily to forbid aliens to engage
in ordinary kinds of business to earn their living. (State vs.
Montgomery [1900], 94 Maine, 192, peddling but see.
Commonwealth vs. Hana [1907], 195 Mass., 262; Templar vs.
Board of Examiners of Barbers [1902], 131 Mich., 254, barbers;
Yick Wo vs. Hopkins [1886], 118 U. S.,.356, discrimination against
Chinese; Truax vs. Raich [1915], 239 U. S., 33; In re Parrott
[1880], 1 Fed , 481; Fraser vs. McConway & Torley Co. [1897], 82
Fed , 257; Juniata Limestone Co. vs. Fagley [1898], 187 Penn.,
193, all relating to the employment of aliens by private
corporations.)
A literal application of general principles to the facts before us
would, of course, cause the inevitable deduction that Act No. 2761
is unconstitutional by reason of its denial to a corporation, some
of whole members are foreigners, of the equal protection of the
laws. Like all beneficient propositions, deeper research discloses
provisos. Examples of a denial of rights to aliens notwithstanding
the provisions of the Fourteenth Amendment could be cited.
(Tragesser vs. Gray [1890], 73 Md., 250, licenses to sell
spirituous liquors denied to persons not citizens of the United
States; Commonwealth vs. Hana [1907], 195 Mass , 262,
excluding aliens from the right to peddle; Patsone vs.
Commonwealth of Pennsylvania [1914], 232 U. S. , 138,
prohibiting the killing of any wild bird or animal by any
unnaturalized foreign-born resident; Ex parte Gilleti [1915], 70
Fla., 442, discriminating in favor of citizens with reference to the
taking for private use of the common property in fish and oysters
found in the public waters of the State; Heim vs. McCall [1915],
239 U. S.,.175, and Crane vs. New York [1915], 239 U. S., 195,
limiting employment on public works by, or for, the State or a
municipality to citizens of the United States.)
One of the exceptions to the general rule, most persistent and far
reaching in influence is, that neither the Fourteenth Amendment to
the United States Constitution, broad and comprehensive as it is,
nor any other amendment, "was designed to interfere with the
power of the State, sometimes termed its `police power,' to
prescribe regulations to promote the health, peace, morals,
education, and good order of the people, and legislate so as to
increase the industries of the State, develop its resources and
add to its wealth and prosperity. From the very necessities of

society, legislation of a special character, having these objects in

view, must often be had in certain districts." (Barbier vs. Connolly
[1884], 113 U.S., 27; New Orleans Gas Co. vs. Lousiana Light
Co. [1885], 115 U.S., 650.) This is the same police power which
the United States Supreme Court say "extends to so dealing with
the conditions which exist in the state as to bring out of them the
greatest welfare in of its people." (Bacon vs. Walker [1907], 204
U.S., 311.) For quite similar reasons, none of the provision of the
Philippine Organic Law could could have had the effect of denying
to the Government of the Philippine Islands, acting through its
Legislature, the right to exercise that most essential, insistent, and
illimitable of powers, the sovereign police power, in the promotion
of the general welfare and the public interest. (U. S. vs. Toribio
[1910], 15 Phil., 85; Churchill and Tait vs. Rafferty [1915], 32 Phil.,
580; Rubi vs. Provincial Board of Mindoro [1919], 39 Phil., 660.)
Another notable exception permits of the regulation or distribution
of the public domain or the common property or resources of the
people of the State, so that use may be limited to its citizens. (Ex
parte Gilleti [1915], 70 Fla., 442; McCready vs. Virginia [1876], 94
U. S., 391; Patsone vs. Commonwealth of Pennsylvania [1914],
232U. S., 138.) Still another exception permits of the limitation of
employment in the construction of public works by, or for, the
State or a municipality to citizens of the United States or of the
State. (Atkin vs. Kansas [1903],191 U. S., 207; Heim vs. McCall
[1915], 239 U.S., 175; Crane vs. New York [1915], 239 U. S.,
195.) Even as to classification, it is admitted that a State may
classify with reference to the evil to be prevented; the question is
a practical one, dependent upon experience. (Patsone vs.
Commonwealth of Pennsylvania [1914], 232 U. S., 138.)
To justify that portion of Act no. 2761 which permits corporations
or companies to obtain a certificate of Philippine registry only on
condition that they be composed wholly of citizens of the
Philippine Islands or of the United States or both, as not infringing
Philippine Organic Law, it must be done under some one of the
exceptions here mentioned This must be done, moreover, having
particularly in mind what is so often of controlling effect in this
jurisdiction our local experience and our peculiar local
conditions.
To recall a few facts in geography, within the confines of
Philippine jurisdictional limits are found more than three thousand
islands. Literally, and absolutely, steamship lines are, for an
Insular territory thus situated, the arteries of commerce. If one be
severed, the life-blood of the nation is lost. If on the other hand
these arteries are protected, then the security of the country and
the promotion of the general welfare is sustained. Time and again,
with such conditions confronting it, has the executive branch of
the Government of the Philippine Islands, always later with the
sanction of the judicial branch, taken a firm stand with reference
to the presence of undesirable foreigners. The Government has
thus assumed to act for the all-sufficient and primitive reason of
the benefit and protection of its own citizens and of the selfpreservation and integrity of its dominion. (In re Patterson [1902],
1 Phil., 93; Forbes vs. Chuoco, Tiaco and Crossfield [1910], 16
Phil., 534;.228 U.S., 549; In re McCulloch Dick [1918], 38 Phil.,
41.) Boats owned by foreigners, particularly by such solid and
reputable firms as the instant claimant, might indeed traverse the
waters of the Philippines for ages without doing any particular
harm. Again, some evilminded foreigner might very easily take
advantage of such lavish hospitality to chart Philippine waters, to
obtain valuable information for unfriendly foreign powers, to stir up
insurrection, or to prejudice Filipino or American commerce.
Moreover, under the Spanish portion of Philippine law, the waters
within the domestic jurisdiction are deemed part of the national
domain, open to public use. (Book II, Tit. IV, Ch. I, Civil Code;
Spanish Law of Waters of August 3, 1866, arts 1, 2, 3.) Common
carriers which in the Philippines as in the United States and other
countries are, as Lord Hale said, "affected with a public interest,"

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can only be permitted to use these public waters as a privilege

and under such conditions as to the representatives of the people
may seem wise. (See De Villata vs. Stanley [1915], 32 Phil., 541.)
In Patsone vs. Commonwealth of Pennsylvania ([1913], 232 U.S.,
138), a case herein before mentioned, Justice Holmes delivering
the opinion of the United States Supreme Court said:
This statute makes it unlawful for any unnaturalized
foreign-born resident to kill any wild bird or animal
except in defense of person or property, and `to that
end' makes it unlawful for such foreign-born person to
own or be possessed of a shotgun or rifle; with a
penalty of $25 and a forfeiture of the gun or guns. The
plaintiff in error was found guilty and was sentenced to
pay the abovementioned fine. The judgment was
affirmed on successive appeals. (231 Pa., 46; 79 Atl.,
928.) He brings the case to this court on the ground that
the statute is contrary to the 14th Amendment and also
is in contravention of the treaty between the United
States and Italy, to which latter country the plaintiff in
error belongs .
Under the 14th Amendment the objection is twofold;
unjustifiably depriving the alien of property, and
discrimination against such aliens as a class. But the
former really depends upon the latter, since it hardly
can be disputed that if the lawful object, the protection
of wild life (Geer vs. Connecticut, 161 U.S., 519; 40 L.
ed., 793; 16 Sup. Ct. Rep., 600), warrants the
discrimination, the, means adopted for making it
effective also might be adopted. . . .
The discrimination undoubtedly presents a more difficult
question. But we start with reference to the evil to be
prevented, and that if the class discriminated against is
or reasonably might be considered to define those from
whom the evil mainly is to be feared, it properly may be
picked out. A lack of abstract symmetry does not matter.
The question is a practical one, dependent upon
experience. . . .
The question therefore narrows itself to whether this
court can say that the legislature of Pennsylvania was
not warranted in assuming as its premise for the law
that resident unnaturalized aliens were the peculiar
source of the evil that it desired to prevent. (Barrett vs.
Indiana,. 229 U.S., 26, 29; 57 L. ed., 1050, 1052; 33
Sup. Ct. Rep., 692.)
Obviously the question, so stated, is one of local
experience, on which this court ought to be very slow to
declare that the state legislature was wrong in its facts
(Adams vs. Milwaukee, 228 U.S., 572, 583; 57 L. ed.,
971,.977; 33 Sup. Ct. Rep., 610.) If we might trust
popular speech in some states it was right; but it is
enough that this court has no such knowledge of local
conditions as to be able to say that it was manifestly
wrong. . . .
Judgment affirmed.
We are inclined to the view that while Smith, Bell & Co. Ltd., a
corporation having alien stockholders, is entitled to the protection
afforded by the due-process of law and equal protection of the
laws clause of the Philippine Bill of Rights, nevertheless, Act No.

2761 of the Philippine Legislature, in denying to corporations such

as Smith, Bell &. Co. Ltd., the right to register vessels in the
Philippines coastwise trade, does not belong to that vicious
species of class legislation which must always be condemned, but
does fall within authorized exceptions, notably, within the purview
of the police power, and so does not offend against the
constitutional provision.
This opinion might well be brought to a close at this point. It
occurs to us, however, that the legislative history of the United
States and the Philippine Islands, and, probably, the legislative
history of other countries, if we were to take the time to search it
out, might disclose similar attempts at restriction on the right to
enter the coastwise trade, and might thus furnish valuable aid by
which to ascertain and, if possible, effectuate legislative intention.
3. The power to regulate commerce, expressly
delegated to the Congress by the Constitution, includes
the power to nationalize ships built and owned in the
United States by registries and enrollments, and the
recording of the muniments of title of American vessels.
The Congress "may encourage or it may entirely
prohibit such commerce, and it may regulate in any way
it may see fit between these two extremes." (U.S. vs.
Craig [1886], 28 Fed., 795; Gibbons vs. Ogden [1824],
9 Wheat., 1; The Passenger Cases [1849], 7 How.,
283.)
Acting within the purview of such power, the first Congress of the
United States had not been long convened before it enacted on
September 1, 1789, "An Act for Registering and Clearing Vessels,
Regulating the Coasting Trade, and for other purposes." Section 1
of this law provided that for any ship or vessel to obtain the
benefits of American registry, it must belong wholly to a citizen or
citizens of the United States "and no other." (1 Stat. at L., 55.)
That Act was shortly after repealed, but the same idea was
carried into the Acts of Congress of December 31, 1792 and
February 18, 1793. (1 Stat. at L., 287, 305.).Section 4 of the Act of
1792 provided that in order to obtain the registry of any vessel, an
oath shall be taken and subscribed by the owner, or by one of the
owners thereof, before the officer authorized to make such
registry, declaring, "that there is no subject or citizen of any
foreign prince or state, directly or indirectly, by way of trust,
confidence, or otherwise, interested in such vessel, or in the
profits or issues thereof." Section 32 of the Act of 1793 even went
so far as to say "that if any licensed ship or vessel shall be
transferred to any person who is not at the time of such transfer a
citizen of and resident within the United States, ... every such
vessel with her tackle, apparel, and furniture, and the cargo found
on board her, shall be forefeited." In case of alienation to a
foreigner, Chief Justice Marshall said that all the privileges of an
American bottom were ipso facto forfeited. (U.S. vs. Willings and
Francis [1807], 4 Cranch, 48.) Even as late as 1873, the AttorneyGeneral of the United States was of the opinion that under the
provisions of the Act of December 31, 1792, no vessel in which a
foreigner is directly or indirectly interested can lawfully be
registered as a vessel of the United. States. (14 Op. Atty.-Gen.
[U.S.], 340.)
These laws continued in force without contest, although possibly
the Act of March 3, 1825, may have affected them, until amended
by the Act of May 28, 1896 (29 Stat. at L., 188) which extended
the privileges of registry from vessels wholly owned by a citizen or
citizens of the United States to corporations created under the
laws of any of the states thereof. The law, as amended, made
possible the deduction that a vessel belonging to a domestic
corporation was entitled to registry or enrollment even though
some stock of the company be owned by aliens. The right of

VOLENTI NON FIT INJURIA

CORPORATION LAW | 29

ownership of stock in a corporation was thereafter distinct from

the right to hold the property by the corporation (Humphreys vs.
McKissock [1890], 140 U.S., 304; Queen vs. Arnaud [1846], 9 Q.
B., 806; 29 Op. Atty.-Gen. [U.S.],188.)
On American occupation of the Philippines, the new government
found a substantive law in operation in the Islands with a civil law
history which it wisely continued in force Article fifteen of the
Spanish Code of Commerce permitted any foreigner to engage in
Philippine trade if he had legal capacity to do so under the laws of
his nation. When the Philippine Commission came to enact the
Customs Administrative Act (No. 355) in 1902, it returned to the
old American policy of limiting the protection and flag of the United
States to vessels owned by citizens of the United States or by
native inhabitants of the Philippine Islands (Sec. 117.) Two years
later, the same body reverted to the existing Congressional law by
permitting certification to be issued to a citizen of the United
States or to a corporation or company created under the laws of
the United States or of any state thereof or of the Philippine
Islands (Act No. 1235, sec. 3.) The two administration codes
repeated the same provisions with the necessary amplification of
inclusion of citizens or native inhabitants of the Philippine Islands
(Adm. Code of 1916, sec. 1345; Adm. Code of 1917, sec. 1172).
And now Act No. 2761 has returned to the restrictive idea of the
original Customs Administrative Act which in turn was merely a
reflection of the statutory language of the first American
Congress.
Provisions such as those in Act No. 2761, which deny to
foreigners the right to a certificate of Philippine registry, are thus
found not to be as radical as a first reading would make them
appear.
Without any subterfuge, the apparent purpose of the Philippine
Legislature is seen to be to enact an anti-alien shipping act. The
ultimate purpose of the Legislature is to encourage Philippine
ship-building. This, without doubt, has, likewise, been the
intention of the United States Congress in passing navigation or
tariff laws on different occasions. The object of such a law, the
United States Supreme Court once said, was to encourage
American trade, navigation, and ship-building by giving American
ship-owners exclusive privileges. (Old Dominion Steamship Co.
vs. Virginia [1905], 198 U.S., 299; Kent's Commentaries, Vol. 3, p.
139.)
In the concurring opinion of Justice Johnson in Gibbons vs.
Ogden ([1824], 9 Wheat., 1) is found the following:
Licensing acts, in fact, in legislation, are universally
restraining acts; as, for example, acts licensing gaming
houses, retailers of spirituous liquors, etc. The act, in
this instance, is distinctly of that character, and forms
part of an extensive system, the object of which is to
encourage American shipping, and place them on an
equal footing with the shipping of other nations. Almost
every commercial nation reserves to its own subjects a
monopoly of its coasting trade; and a countervailing
privilege in favor of American shipping is contemplated,
in the whole legislation of the United States on this
subject. It is not to give the vessel an American
character, that the license is granted; that effect has
been correctly attributed to the act of her enrollment.
But it is to confer on her American privileges, as
contradistinguished from foreign; and to preserve the.
Government from fraud by foreigners, in surreptitiously
intruding themselves into the American commercial

marine, as well as frauds upon the revenue in the trade

coastwise, that this whole system is projected.
The United States Congress in assuming its grave responsibility
of legislating wisely for a new country did so imbued with a spirit
of Americanism. Domestic navigation and trade, it decreed, could
only be carried on by citizens of the United States. If the
representatives of the American people acted in this patriotic
manner to advance the national policy, and if their action was
accepted without protest in the courts, who can say that they did
not enact such beneficial laws under the all-pervading police
power, with the prime motive of safeguarding the country and of
promoting its prosperity? Quite similarly, the Philippine Legislature
made up entirely of Filipinos, representing the mandate of the
Filipino people and the guardian of their rights, acting under
practically autonomous powers, and imbued with a strong sense
of Philippinism, has desired for these Islands safety from foreign
interlopers, the use of the common property exclusively by its
citizens and the citizens of the United States, and protection for
the common good of the people. Who can say, therefore,
especially can a court, that with all the facts and circumstances
affecting the Filipino people before it, the Philippine Legislature
has erred in the enactment of Act No. 2761?
Surely, the members of the judiciary are not expected to live apart
from active life, in monastic seclusion amidst dusty tomes and
ancient records, but, as keen spectators of passing events and
alive to the dictates of the general the national welfare, can
incline the scales of their decisions in favor of that solution which
will most effectively promote the public policy. All the presumption
is in favor of the constitutionally of the law and without good and
strong reasons, courts should not attempt to nullify the action of
the Legislature. "In construing a statute enacted by the Philippine
Commission (Legislature), we deem it our duty not to give it a
construction which would be repugnant to an Act of Congress, if
the language of the statute is fairly susceptible of another
construction not in conflict with the higher law." (In re Guaria
[1913], 24. Phil., 36; U.S. vs. Ten Yu [1912], 24 Phil., 1.) That is
the true construction which will best carry legislative intention into
effect.
With full consciousness of the importance of the question, we
nevertheless are clearly of the opinion that the limitation of
domestic ownership for purposes of obtaining a certificate of
Philippine registry in the coastwise trade to citizens of the
Philippine Islands, and to citizens of the United States, does not
violate the provisions of paragraph 1 of section 3 of the Act of
Congress of August 29, 1916 No treaty right relied upon Act No.
2761 of the Philippine Legislature is held valid and constitutional .
The petition for a writ of mandamus is denied, with costs against
the petitioner. So ordered.
Arellano, C.J., Torres, Johnson, Araullo, Street, Avancea and
Moir, JJ., concur.

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CORPORATION LAW | 30

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-19550

June 19, 1967

HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J.

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

1. CONSTITUTIONAL LAW; SEARCH AND SEIZURE; WHO MAY

CONTEST LEGALITY THEREOF CASE AT BAR. It is well
settled that the legality of a seizure can be contested only by the
party whose rights have been impaired thereby (Lewis v. U.S., 6
F. 2d. 22) and that the objection to an unlawful search and seizure
is purely personal and cannot be availed of by third parties (In. re
Dooley, 48 F. 2d. 121: Rouda v. U.S., 10 F. 2d. 916; Lusco v. U.S.,
287 F. 69; Ganci v. U.S., 287 F, 60; Moriz v. U.S., 26 F. 2d. 444).
Consequently, petitioner in the case at bar may not validly object
to the use in evidence against them of the document, papers, and
things seized from the offices and premises of the corporation
adverted to, since the right to object to the admission of said
papers in evidence belongs exclusively to the corporations, to
whom the seized effects belong, and may not be invoked by the
corporate officers in proceedings against them in their individual
capacity U.S., v. Gaas, 17 F. 2d. 997; People v. Rubio, 57 Phil.,
384).
2. ID.; ID.; REQUISITES FOR ISSUANCE OF SEARCH
WARRANT. Two points must be stressed in connection with
this constitutional mandate, namely: (1) that no warrant issue but
upon probable cause, to be determined by the judge in the
manner set forth in said provision; and (2) that the warrant shall
particularly describe the things to be seized. None of these
requirements has been complied with in the contested warrants.
Indeed, the same were issued upon applications stating that the
natural and juridical persons therein named had committed a
"violation of Central Bank Laws, Tariff and Customs Laws, Internal
Revenue (Code) and Revised Penal Code." In other words, no
specific offense had been alleged in said applications. The
averments thereof with respect to the offense committed were
abstract. As a consequence, it was impossible for the judges who
issued the warrants to have found the existence of probable
cause, for the same presupposes the introduction of competent
proof that the party against whom it is sought has performed

particular acts, or committed specific omissions, violating a given

provision of our criminal laws. As a matter of fact, the applications
involved in the case at bar do not allege any specific acts
performed by herein petitioners. It would be a legal heresy, of the
highest order, to convict anybody of a "violation of Central Bank
Laws, Tariff and Customs Laws, Internal Revenue (Code) and
Revised Penal Code", as alleged in aforementioned
applications without reference to any determine provision of
said laws or coders.
3. ID.; ID.; ID.; GENERAL WARRANTS ARE OUTLAWED BY
THE CONSTITUTION. To uphold the validity of the warrants in
question, would be to wipe out completely one of the most
fundamental rights guaranteed in our Constitution, for it would
place the sanctity of the domicile and the privacy of
communication and correspondence at the mercy of the victims,
caprice or passion of peace officers. This is precisely the evil
sought to be remedied by the constitutional provision Sec. 1, par.
3 Art. III, Const.) to outlaw the so-called general warrants. It is
not difficult to imagine what would happen, in times of keen
political strife, when the party in power feels that the minority is
likely to wrest it, even though by legal means. Such is the
seriousness of the irregularities committed in connection with the
disputed search warrants, that this Court deemed it fit to amend
Section 3 of Rule 122 of the former Rules of Court, by providing in
its counterpart, under the Revised Rules of Court (Sec. 3, Rule
126) that "a search warrant shall not issue but upon probable
cause in connection with one specific offense." Not satisfied with
this qualification, the Court added thereto paragraph, directing
that "no search warrant shall issue for more than one specific
offense."cralaw
virtua1aw
library
4. ID.; ID.; ID.; ID.; CASE AT BAR. The grave violation of the
Constitution made in the application for the contested search
warrants was compounded by the description therein made of the
effects to be searched for and seized, to wit: "Books of accounts,
Financial records, vouchers, journals, correspondence, receipts,
ledgers, portfolios, credit journals, typewriters, and other
documents and/or papers, showing all business transactions
including disbursement receipts, balance sheets and related profit
and loss statements." Thus, the warrants authorized the search
for and seizure of records pertaining to all business transactions
petitioners herein, regardless of whether the transaction were
legal or illegal. The warrants sanctioned the seizure of all records
of the petitioners and the aforementioned corporations, whatever
their nature, thus openly contravening the explicit command of our
Bill of Rights that the things to be seized be particularly
described as well as tending to defeat its major objective: the
elimination of general warrants.
5. ID.; ID.; ID.; NON-EXCLUSIONARY RULE CONTRAVENES
THE
CONSTITUTIONAL
PROHIBITIONS
AGAINST
UNREASONABLE SEARCH AND SEIZURES. Indeed, the
non-exclusionary rule is contrary, not only to the letter, but also to
the spirit of the constitutional injunction against unreasonable
searches and seizures. To be sure, if the applicant for a search
warrant has competent evidence to establish probable cause of
the commission of a given crime by the party against whom the
warrant is intended, then there is no reason why the applicant
should not comply with the requirements of the fundamental law.
Upon the other hand, if he has no such competent evidence, then
it is not possible for the Judge to find that there is probable cause
and only possible for the Judge to find that there is probable
cause and hence, no justification for the issuance of the warrant.
The only possible explanation (not justification) for its issuance is
the necessity of fishing evidence of the commission of crime.
crime. But when this fishing expedition is indicative of the
absence of evidence to establish a probable cause.
6. ID.; ID.; ID.; ID.; PROSECUTION OF THOSE WHO SECURE

VOLENTI NON FIT INJURIA

CORPORATION LAW | 31

ILLEGAL SEARCH WARRANT OR MAKE UNREASONABLE

SEARCH OR SEIZURE IS NO EXCUSE. The theory that the
criminal prosecution of those who secure an illegal search warrant
and/or make unreasonable searches or seizures would suffice to
protect the constitutional guarantee under consideration,
overlooks the fact that violations thereof are, in general,
committed by agents of the party in power, for certainly, those
belonging to the minority could not possibly abuse a power they
do not have. Regardless of the handicap under which the minority
usually but understandably finds itself in prosecuting agents of the
majority, one must not lose sight of the fact that the psychological
and moral effect of the possibility of securing their conviction, is
watered down by the pardoning power of the party for whose
benefit the illegality had been committed.
7. ID.; ID.; ID.; MONCADO DOCTRINE ABANDONED. The
doctrine adopted in the Moncado case must be, as it is hereby,
abandoned; the warrants for the search of 3 residences of
petitioners, as specified in the Resolution of June 29, 1962, are
null and void; the searches and seizures therein made are illegal.

respondents, their agents or representatives to return to

petitioners herein, in accordance with Section 3, Rule 67, of the
Rules of Court, the documents, papers, things and cash moneys
seized or confiscated under the search warrants in question.
In their answer, respondents-prosecutors alleged, 6 (1) that the
contested search warrants are valid and have been issued in
accordance with law; (2) that the defects of said warrants, if any,
were cured by petitioners' consent; and (3) that, in any event, the
effects seized are admissible in evidence against herein
petitioners, regardless of the alleged illegality of the
aforementioned searches and seizures.
On March 22, 1962, this Court issued the writ of preliminary
injunction prayed for in the petition. However, by resolution dated
June 29, 1962, the writ was partially lifted or dissolved, insofar as
the papers, documents and things seized from the offices of the
corporations above mentioned are concerned; but, the injunction
was maintained as regards the papers, documents and things
found and seized in the residences of petitioners herein.7

CONCEPCION, C.J.:
Upon application of the officers of the government named on the
margin1 hereinafter referred to as Respondents-Prosecutors
several judges2 hereinafter referred to as Respondents-Judges
issued, on different dates,3 a total of 42 search warrants
against petitioners herein4 and/or the corporations of which they
were officers,5 directed to the any peace officer, to search the
persons above-named and/or the premises of their offices,
warehouses and/or residences, and to seize and take possession
of the following personal property to wit:

Thus, the documents, papers, and things seized under the

alleged authority of the warrants in question may be split into two
(2) major groups, namely: (a) those found and seized in the
offices of the aforementioned corporations, and (b) those found
and seized in the residences of petitioners herein.

as "the subject of the offense; stolen or embezzled and proceeds

or fruits of the offense," or "used or intended to be used as the
means of committing the offense," which is described in the
applications adverted to above as "violation of Central Bank
Laws, Tariff and Customs Laws, Internal Revenue (Code) and the
Revised Penal Code."

As regards the first group, we hold that petitioners herein have no

cause of action to assail the legality of the contested warrants and
of the seizures made in pursuance thereof, for the simple reason
that said corporations have their respective personalities,
separate and distinct from the personality of herein petitioners,
regardless of the amount of shares of stock or of the interest of
each of them in said corporations, and whatever the offices they
hold therein may be.8 Indeed, it is well settled that the legality of a
seizure can be contested only by the party whose rights have
been impaired thereby,9 and that the objection to an unlawful
search and seizure is purely personal and cannot be availed of by
third parties. 10 Consequently, petitioners herein may not validly
object to the use in evidence against them of the documents,
papers and things seized from the offices and premises of the
corporations adverted to above, since the right to object to the
admission of said papers in evidence belongs exclusively to the
corporations, to whom the seized effects belong, and may not be
invoked by the corporate officers in proceedings against them in
their individual capacity. 11 Indeed, it has been held:

Alleging that the aforementioned search warrants are null and

void, as contravening the Constitution and the Rules of Court
because, inter alia: (1) they do not describe with particularity the
documents, books and things to be seized; (2) cash money, not
mentioned in the warrants, were actually seized; (3) the warrants
were issued to fish evidence against the aforementioned
petitioners in deportation cases filed against them; (4) the
searches and seizures were made in an illegal manner; and (5)
the documents, papers and cash money seized were not
delivered to the courts that issued the warrants, to be disposed of
in accordance with law on March 20, 1962, said petitioners
filed with the Supreme Court this original action for certiorari,
prohibition, mandamus and injunction, and prayed that, pending
final disposition of the present case, a writ of preliminary
injunction be issued restraining Respondents-Prosecutors, their
agents and /or representatives from using the effects seized as
aforementioned or any copies thereof, in the deportation cases
already adverted to, and that, in due course, thereafter, decision
be rendered quashing the contested search warrants and
declaring the same null and void, and commanding the

. . . that the Government's action in gaining possession

of papers belonging to the corporation did not relate to
nor did it affect the personal defendants. If these papers
were unlawfully seized and thereby the constitutional
rights of or any one were invaded, they were the rights
of the corporation and not the rights of the other
defendants. Next, it is clear that a question of the
lawfulness of a seizure can be raised only by one
whose rights have been invaded. Certainly, such a
seizure, if unlawful, could not affect the constitutional
rights of defendants whose property had not been
seized or the privacy of whose homes had not been
disturbed; nor could they claim for themselves the
benefits of the Fourth Amendment, when its violation, if
any, was with reference to the rights of another. Remus
vs. United States (C.C.A.)291 F. 501, 511. It follows,
therefore, that the question of the admissibility of the
evidence based on an alleged unlawful search and
seizure does not extend to the personal defendants but
embraces only the corporation whose property was

Books of accounts, financial records, vouchers,

correspondence, receipts, ledgers, journals, portfolios,
credit journals, typewriters, and other documents and/or
papers showing all business transactions including
disbursements receipts, balance sheets and profit and
loss statements and Bobbins (cigarette wrappers).

VOLENTI NON FIT INJURIA

CORPORATION LAW | 32

taken. . . . (A Guckenheimer & Bros. Co. vs. United

States, [1925] 3 F. 2d. 786, 789, Emphasis supplied.)
With respect to the documents, papers and things seized in the
residences of petitioners herein, the aforementioned resolution of
June 29, 1962, lifted the writ of preliminary injunction previously
issued by this Court, 12 thereby, in effect, restraining herein
Respondents-Prosecutors from using them in evidence against
petitioners herein.
In connection with said documents, papers and things, two (2)
important questions need be settled, namely: (1) whether the
search warrants in question, and the searches and seizures made
under the authority thereof, are valid or not, and (2) if the answer
to the preceding question is in the negative, whether said
documents, papers and things may be used in evidence against
petitioners herein.1wph1.t
Petitioners maintain that the aforementioned search warrants are
in the nature of general warrants and that accordingly, the
seizures effected upon the authority there of are null and void. In
this connection, the Constitution 13 provides:
The right of the people to be secure in their persons,
houses, papers, and effects against unreasonable
searches and seizures shall not be violated, and no
warrants shall issue but upon probable cause, to be
determined by the judge after examination under oath
or affirmation of the complainant and the witnesses he
may produce, and particularly describing the place to
be searched, and the persons or things to be seized.
Two points must be stressed in connection with this constitutional
mandate, namely: (1) that no warrant shall issue but upon
probable cause, to be determined by the judge in the manner set
forth in said provision; and (2) that the warrant shall particularly
describe the things to be seized.
None of these requirements has been complied with in the
contested warrants. Indeed, the same were issued upon
applications stating that the natural and juridical person therein
named had committed a "violation of Central Ban Laws, Tariff and
Customs Laws, Internal Revenue (Code) and Revised Penal
Code." In other words, no specific offense had been alleged in
said applications. The averments thereof with respect to the
offense committed were abstract. As a consequence, it was
impossible for the judges who issued the warrants to have found
the existence of probable cause, for the same presupposes the
introduction of competent proof that the party against whom it is
sought has performed particular acts, or committed specific
omissions, violating a given provision of our criminal laws. As a
matter of fact, the applications involved in this case do not allege
any specific acts performed by herein petitioners. It would be the
legal heresy, of the highest order, to convict anybody of a
"violation of Central Bank Laws, Tariff and Customs Laws, Internal
Revenue (Code) and Revised Penal Code," as alleged in the
aforementioned applications without reference to any
determinate provision of said laws or
To uphold the validity of the warrants in question would be to wipe
out completely one of the most fundamental rights guaranteed in
our Constitution, for it would place the sanctity of the domicile and
the privacy of communication and correspondence at the mercy of
the whims caprice or passion of peace officers. This is precisely
the evil sought to be remedied by the constitutional provision
above quoted to outlaw the so-called general warrants. It is not

difficult to imagine what would happen, in times of keen political

strife, when the party in power feels that the minority is likely to
wrest it, even though by legal means.
Such is the seriousness of the irregularities committed in
connection with the disputed search warrants, that this Court
deemed it fit to amend Section 3 of Rule 122 of the former Rules
of Court 14 by providing in its counterpart, under the Revised
Rules of Court 15 that "a search warrant shall not issue but upon
probable cause in connection with one specific offense." Not
satisfied with this qualification, the Court added thereto a
paragraph, directing that "no search warrant shall issue for more
than one specific offense."
The grave violation of the Constitution made in the application for
the contested search warrants was compounded by the
description therein made of the effects to be searched for and
seized, to wit:
Books of accounts, financial records, vouchers,
journals, correspondence, receipts, ledgers, portfolios,
credit journals, typewriters, and other documents and/or
papers showing all business transactions including
disbursement receipts, balance sheets and related
profit and loss statements.
Thus, the warrants authorized the search for and seizure of
records pertaining to all business transactions of petitioners
herein, regardless of whether the transactions were legal or
illegal. The warrants sanctioned the seizure of all records of the
petitioners and the aforementioned corporations, whatever their
nature, thus openly contravening the explicit command of our Bill
of Rights that the things to be seized be particularly described
as well as tending to defeat its major objective: the elimination
of general warrants.
Relying upon Moncado vs. People's Court (80 Phil. 1),
Respondents-Prosecutors maintain that, even if the searches and
seizures under consideration were unconstitutional, the
documents, papers and things thus seized are admissible in
evidence against petitioners herein. Upon mature deliberation,
however, we are unanimously of the opinion that the position
taken in the Moncado case must be abandoned. Said position
was in line with the American common law rule, that the criminal
should not be allowed to go free merely "because the constable
has blundered," 16 upon the theory that the constitutional
prohibition against unreasonable searches and seizures is
protected by means other than the exclusion of evidence
unlawfully obtained, 17 such as the common-law action for
damages against the searching officer, against the party who
procured the issuance of the search warrant and against those
assisting in the execution of an illegal search, their criminal
punishment, resistance, without liability to an unlawful seizure,
and such other legal remedies as may be provided by other laws.
However, most common law jurisdictions have already given up
this approach and eventually adopted the exclusionary rule,
realizing that this is the only practical means of enforcing the
constitutional injunction against unreasonable searches and
seizures. In the language of Judge Learned Hand:
As we understand it, the reason for the exclusion of
evidence competent as such, which has been
unlawfully acquired, is that exclusion is the only
practical way of enforcing the constitutional privilege. In
earlier times the action of trespass against the

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offending official may have been

that is true no longer. Only in
which itself controls the seizing
cannot profit by their wrong
repressed.18

protection enough; but

case the prosecution
officials, knows that it
will that wrong be

In fact, over thirty (30) years before, the Federal Supreme Court
had already declared:
If letters and private documents can thus be seized and
held and used in evidence against a citizen accused of
an offense, the protection of the 4th Amendment,
declaring his rights to be secure against such searches
and seizures, is of no value, and, so far as those thus
placed are concerned, might as well be stricken from
the Constitution. The efforts of the courts and their
officials to bring the guilty to punishment, praiseworthy
as they are, are not to be aided by the sacrifice of those
great principles established by years of endeavor and
suffering which have resulted in their embodiment in
the fundamental law of the land.19
This view was, not only reiterated, but, also, broadened in
subsequent decisions on the same Federal Court. 20 After
reviewing previous decisions thereon, said Court held, in Mapp
vs. Ohio (supra.):
. . . Today we once again examine the Wolf's
constitutional documentation of the right of privacy free
from unreasonable state intrusion, and after its dozen
years on our books, are led by it to close the only
courtroom door remaining open to evidence secured by
official lawlessness in flagrant abuse of that basic right,
reserved to all persons as a specific guarantee against
that very same unlawful conduct. We hold that all
evidence obtained by searches and seizures in violation
of the Constitution is, by that same authority,
inadmissible in a State.
Since the Fourth Amendment's right of privacy has
been declared enforceable against the States through
the Due Process Clause of the Fourteenth, it is
enforceable against them by the same sanction of
exclusion as it used against the Federal Government.
Were it otherwise, then just as without the Weeks rule
the assurance against unreasonable federal searches
and seizures would be "a form of words," valueless and
underserving of mention in a perpetual charter of
inestimable human liberties, so too, without that rule
the freedom from state invasions of privacy would be
so ephemeral and so neatly severed from its
conceptual nexus with the freedom from all brutish
means of coercing evidence as not to permit this
Court's high regard as a freedom "implicit in the
concept of ordered liberty." At the time that the Court
held in Wolf that the amendment was applicable to the
States through the Due Process Clause, the cases of
this Court as we have seen, had steadfastly held that
as to federal officers the Fourth Amendment included
the exclusion of the evidence seized in violation of its
provisions. Even Wolf "stoutly adhered" to that
proposition. The right to when conceded operatively
enforceable against the States, was not susceptible of
destruction by avulsion of the sanction upon which its
protection and enjoyment had always been deemed
dependent under the Boyd, Weeks and Silverthorne
Cases. Therefore, in extending the substantive

protections of due process to all constitutionally

unreasonable searches state or federal it was
logically and constitutionally necessarily that the
exclusion doctrine an essential part of the right to
privacy be also insisted upon as an essential
ingredient of the right newly recognized by the Wolf
Case. In short, the admission of the new constitutional
Right by Wolf could not tolerate denial of its most
important constitutional privilege, namely, the exclusion
of the evidence which an accused had been forced to
give by reason of the unlawful seizure. To hold
otherwise is to grant the right but in reality to withhold
its privilege and enjoyment. Only last year the Court
itself recognized that the purpose of the exclusionary
rule to "is to deter to compel respect for the
constitutional guaranty in the only effectively available
way by removing the incentive to disregard it" . . . .
The ignoble shortcut to conviction left open to the State
tends to destroy the entire system of constitutional
restraints on which the liberties of the people rest.
Having once recognized that the right to privacy
embodied in the Fourth Amendment is enforceable
against the States, and that the right to be secure
against rude invasions of privacy by state officers is,
therefore constitutional in origin, we can no longer
permit that right to remain an empty promise. Because
it is enforceable in the same manner and to like effect
as other basic rights secured by its Due Process
Clause, we can no longer permit it to be revocable at
the whim of any police officer who, in the name of law
enforcement itself, chooses to suspend its enjoyment.
Our decision, founded on reason and truth, gives to the
individual no more than that which the Constitution
guarantees him to the police officer no less than that to
which honest law enforcement is entitled, and, to the
courts, that judicial integrity so necessary in the true
administration of justice. (emphasis ours.)
Indeed, the non-exclusionary rule is contrary, not only to the letter,
but also, to the spirit of the constitutional injunction against
unreasonable searches and seizures. To be sure, if the applicant
for a search warrant has competent evidence to establish
probable cause of the commission of a given crime by the party
against whom the warrant is intended, then there is no reason
why the applicant should not comply with the requirements of the
fundamental law. Upon the other hand, if he has no such
competent evidence, then it is not possible for the Judge to find
that there is probable cause, and, hence, no justification for the
issuance of the warrant. The only possible explanation (not
justification) for its issuance is the necessity of fishing evidence of
the commission of a crime. But, then, this fishing expedition is
indicative of the absence of evidence to establish a probable
cause.
Moreover, the theory that the criminal prosecution of those who
secure an illegal search warrant and/or make unreasonable
searches or seizures would suffice to protect the constitutional
guarantee under consideration, overlooks the fact that violations
thereof are, in general, committed By agents of the party in power,
for, certainly, those belonging to the minority could not possibly
abuse a power they do not have. Regardless of the handicap
under which the minority usually but, understandably finds
itself in prosecuting agents of the majority, one must not lose sight
of the fact that the psychological and moral effect of the possibility
21
of securing their conviction, is watered down by the pardoning
power of the party for whose benefit the illegality had been
committed.

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In their Motion for Reconsideration and Amendment of the

Resolution of this Court dated June 29, 1962, petitioners allege
that Rooms Nos. 81 and 91 of Carmen Apartments, House No.
2008, Dewey Boulevard, House No. 1436, Colorado Street, and
Room No. 304 of the Army-Navy Club, should be included among
the premises considered in said Resolution as residences of
herein petitioners, Harry S. Stonehill, Robert P. Brook, John J.
Brooks and Karl Beck, respectively, and that, furthermore, the
records, papers and other effects seized in the offices of the
corporations above referred to include personal belongings of
said petitioners and other effects under their exclusive possession
and control, for the exclusion of which they have a standing under
the latest rulings of the federal courts of federal courts of the
United States. 22

From my analysis of the opinion written by Chief Justice Roberto

Concepcion and from the import of the deliberations of the Court
on this case, I gather the following distinct conclusions:

We note, however, that petitioners' theory, regarding their alleged

possession of and control over the aforementioned records,
papers and effects, and the alleged "personal" nature thereof, has
Been Advanced, not in their petition or amended petition herein,
but in the Motion for Reconsideration and Amendment of the
Resolution of June 29, 1962. In other words, said theory would
appear to be readjustment of that followed in said petitions, to suit
the approach intimated in the Resolution sought to be
reconsidered and amended. Then, too, some of the affidavits or
copies of alleged affidavits attached to said motion for
reconsideration, or submitted in support thereof, contain either
inconsistent allegations, or allegations inconsistent with the theory
now advanced by petitioners herein.

3. The non-exclusionary rule enunciated in Moncado

vs. People, 80 Phil. 1, should be, and is declared,
abandoned;

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

1. All the search warrants served by the National

Bureau of Investigation in this case are general
warrants and are therefore proscribed by, and in
violation of, paragraph 3 of section 1 of Article III (Bill of
Rights) of the Constitution;
2. All the searches and seizures conducted under the
authority of the said search warrants were consequently
illegal;

4. The search warrants served at the three residences

of the petitioners are expressly declared null and void
the searches and seizures therein made are expressly
declared illegal; and the writ of preliminary injunction
heretofore issued against the use of the documents,
papers and effect seized in the said residences is made
permanent; and
5. Reasoning that the petitioners have not in their
pleadings satisfactorily demonstrated that they have
legal standing to move for the suppression of the
documents, papers and effects seized in the places
other than the three residences adverted to above, the
opinion written by the Chief Justice refrains from
expressly declaring as null and void the such warrants
served at such other places and as illegal the searches
and seizures made therein, and leaves "the matter
open for determination in appropriate cases in the
future."
It is precisely the position taken by the Chief Justice summarized
in the immediately preceding paragraph (numbered 5) with which
I am not in accord.
I do not share his reluctance or unwillingness to expressly
declare, at this time, the nullity of the search warrants served at
places other than the three residences, and the illegibility of the
searches and seizures conducted under the authority thereof. In
my view even the exacerbating passions and prejudices
inordinately generated by the environmental political and moral
developments of this case should not deter this Court from
forthrightly laying down the law not only for this case but as well
for future cases and future generations. All the search warrants,
without exception, in this case are admittedly general, blanket and
roving warrants and are therefore admittedly and indisputably
outlawed by the Constitution; and the searches and seizures
made were therefore unlawful. That the petitioners, let us assume
in gratia argumente, have no legal standing to ask for the
suppression of the papers, things and effects seized from places
other than their residences, to my mind, cannot in any manner
affect, alter or otherwise modify the intrinsic nullity of the search
warrants and the intrinsic illegality of the searches and seizures
made thereunder. Whether or not the petitioners possess legal
standing the said warrants are void and remain void, and the
searches and seizures were illegal and remain illegal. No
inference can be drawn from the words of the Constitution that
"legal standing" or the lack of it is a determinant of the nullity or

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validity of a search warrant or of the lawfulness or illegality of a

search or seizure.

places himself or his property within a constitutionally protected

area, be it his home or his office, his hotel room or his automobile:

On the question of legal standing, I am of the conviction that,

upon the pleadings submitted to this Court the petitioners have
the requisite legal standing to move for the suppression and
return of the documents, papers and effects that were seized from
places other than their family residences.

Where the argument falls is in its misapprehension of

the fundamental nature and scope of Fourth
Amendment protection. What the Fourth Amendment
protects is the security a man relies upon when he
places himself or his property within a constitutionally
protected area, be it his home or his office, his hotel
room or his automobile. There he is protected from
unwarranted governmental intrusion. And when he puts
some thing in his filing cabinet, in his desk drawer, or in
his pocket, he has the right to know it will be secure
from an unreasonable search or an unreasonable
seizure. So it was that the Fourth Amendment could not
tolerate the warrantless search of the hotel room in
Jeffers, the purloining of the petitioner's private papers
in Gouled, or the surreptitious electronic surveilance in
Silverman. Countless other cases which have come to
this Court over the years have involved a myriad of
differing factual contexts in which the protections of the
Fourth Amendment have been appropriately invoked.
No doubt, the future will bring countless others. By
nothing we say here do we either foresee or foreclose
factual situations to which the Fourth Amendment may
be applicable. (Hoffa vs. U.S., 87 S. Ct. 408 (December
12, 1966). See also U.S. vs. Jeffers, 342 U.S. 48, 72 S.
Ct. 93 (November 13, 1951). (Emphasis supplied).

Our constitutional provision on searches and seizures was

derived almost verbatim from the Fourth Amendment to the
United States Constitution. In the many years of judicial
construction and interpretation of the said constitutional provision,
our courts have invariably regarded as doctrinal the
pronouncement made on the Fourth Amendment by federal
courts, especially the Federal Supreme Court and the Federal
Circuit Courts of Appeals.
The U.S. doctrines and pertinent cases on standing to move for
the suppression or return of documents, papers and effects which
are the fruits of an unlawful search and seizure, may be
summarized as follows; (a) ownership of documents, papers and
effects gives "standing;" (b) ownership and/or control or
possession actual or constructive of premises searched
gives "standing"; and (c) the "aggrieved person" doctrine where
the search warrant and the sworn application for search warrant
are "primarily" directed solely and exclusively against the
"aggrieved person," gives "standing."

Control of premises searched gives "standing."

An examination of the search warrants in this case will readily
show that, excepting three, all were directed against the
petitioners personally. In some of them, the petitioners were
named personally, followed by the designation, "the President
and/or General Manager" of the particular corporation. The three
warrants excepted named three corporate defendants. But the
"office/house/warehouse/premises" mentioned in the said three
warrants were also the same "office/house/warehouse/premises"
declared to be owned by or under the control of the petitioners in
all the other search warrants directed against the petitioners
and/or "the President and/or General Manager" of the particular
corporation. (see pages 5-24 of Petitioners' Reply of April 2,
1962). The searches and seizures were to be made, and were
actually made, in the "office/house/warehouse/premises" owned
by or under the control of the petitioners.
Ownership of matters seized gives "standing."
Ownership of the properties seized alone entitles the petitioners
to bring a motion to return and suppress, and gives them standing
as persons aggrieved by an unlawful search and seizure
regardless of their location at the time of seizure. Jones vs.
United States, 362 U.S. 257, 261 (1960) (narcotics stored in the
apartment of a friend of the defendant); Henzel vs. United States,
296 F. 2d. 650, 652-53 (5th Cir. 1961), (personal and corporate
papers of corporation of which the defendant was president),
United States vs. Jeffers, 342 U.S. 48 (1951) (narcotics seized in
an apartment not belonging to the defendant); Pielow vs. United
States, 8 F. 2d 492, 493 (9th Cir. 1925) (books seized from the
defendant's sister but belonging to the defendant); Cf. Villano vs.
United States, 310 F. 2d 680, 683 (10th Cir. 1962) (papers seized
in desk neither owned by nor in exclusive possession of the
defendant).
In a very recent case (decided by the U.S. Supreme Court on
December 12, 1966), it was held that under the constitutional
provision against unlawful searches and seizures, a person

Independent of ownership or other personal interest in the records

and documents seized, the petitioners have standing to move for
return and suppression by virtue of their proprietary or leasehold
interest in many of the premises searched. These proprietary and
leasehold interests have been sufficiently set forth in their motion
for reconsideration and need not be recounted here, except to
emphasize that the petitioners paid rent, directly or indirectly, for
practically all the premises searched (Room 91, 84 Carmen Apts;
Room 304, Army & Navy Club; Premises 2008, Dewey Boulevard;
1436 Colorado Street); maintained personal offices within the
corporate offices (IBMC, USTC); had made improvements or
furnished such offices; or had paid for the filing cabinets in which
the papers were stored (Room 204, Army & Navy Club); and
individually, or through their respective spouses, owned the
controlling stock of the corporations involved. The petitioners'
proprietary interest in most, if not all, of the premises searched
therefore independently gives them standing to move for the
return and suppression of the books, papers and affects seized
therefrom.
In Jones vs. United States, supra, the U.S. Supreme Court
delineated the nature and extent of the interest in the searched
premises necessary to maintain a motion to suppress. After
reviewing what it considered to be the unduly technical standard
of the then prevailing circuit court decisions, the Supreme Court
said (362 U.S. 266):
We do not lightly depart from this course of decisions
by the lower courts. We are persuaded, however, that it
is unnecessarily and ill-advised to import into the law
surrounding the constitutional right to be free from
unreasonable
searches
and
seizures
subtle
distinctions, developed and refined by the common law
in evolving the body of private property law which, more
than almost any other branch of law, has been shaped
by distinctions whose validity is largely historical. Even

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CORPORATION LAW | 36

in the area from which they derive, due consideration

has led to the discarding of those distinctions in the
homeland of the common law. See Occupiers' Liability
Act, 1957, 5 and 6 Eliz. 2, c. 31, carrying out Law
Reform Committee, Third Report, Cmd. 9305.
Distinctions such as those between "lessee", "licensee,"
"invitee," "guest," often only of gossamer strength,
ought not be determinative in fashioning procedures
ultimately referable to constitutional safeguards. See
also Chapman vs. United States, 354 U.S. 610, 616-17
(1961).
It has never been held that a person with requisite interest in the
premises searched must own the property seized in order to have
standing in a motion to return and suppress. In Alioto vs. United
States, 216 F. Supp. 48 (1963), a Bookkeeper for several
corporations from whose apartment the corporate records were
seized successfully moved for their return. In United States vs.
Antonelli, Fireworks Co., 53 F. Supp. 870, 873 (W D. N. Y. 1943),
the corporation's president successfully moved for the return and
suppression is to him of both personal and corporate documents
seized from his home during the course of an illegal search:
The lawful possession by Antonelli of documents and
property, "either his own or the corporation's was
entitled to protection against unreasonable search and
seizure. Under the circumstances in the case at bar, the
search and seizure were unreasonable and unlawful.
The motion for the return of seized article and the
suppression of the evidence so obtained should be
granted. (Emphasis supplied).
Time was when only a person who had property in interest in
either the place searched or the articles seize had the necessary
standing to invoke the protection of the exclusionary rule. But in
MacDonald vs. Unite States, 335 U.S. 461 (1948), Justice Robert
Jackson joined by Justice Felix Frankfurter, advanced the view
that "even a guest may expect the shelter of the rooftree he is
under against criminal intrusion." This view finally became the
official view of the U.S. Supreme Court and was articulated in
United States vs. Jeffers, 432 U.S 48 (1951). Nine years later, in
1960, in Jones vs. Unite States, 362 U.S. 257, 267, the U.S.
Supreme Court went a step further. Jones was a mere guest in
the apartment unlawfully searched but the Court nonetheless
declared that the exclusionary rule protected him as well. The
concept of "person aggrieved by an unlawful search and seizure"
was enlarged to include "anyone legitimately on premise where
the search occurs."
Shortly after the U.S. Supreme Court's Jones decision the U.S.
Court of Appeals for the Fifth Circuit held that the defendant
organizer, sole stockholder and president of a corporation had
standing in a mail fraud prosecution against him to demand the
return and suppression of corporate property. Henzel vs. United
States, 296 F 2d 650, 652 (5th Cir. 1961), supra. The court
conclude that the defendant had standing on two independent
grounds: First he had a sufficient interest in the property
seized, and second he had an adequate interest in the
premises searched (just like in the case at bar). A postal inspector
had unlawfully searched the corporation' premises and had
seized most of the corporation's book and records. Looking to
Jones, the court observed:
Jones clearly tells us, therefore, what is not required
qualify one as a "person aggrieved by an unlawful
search and seizure." It tells us that appellant should not
have been precluded from objecting to the Postal

Inspector's search and seizure of the corporation's

books and records merely because the appellant did
not show ownership or possession of the books and
records or a substantial possessory interest in the
invade premises . . . (Henzel vs. United States, 296 F.
2d at 651). .
Henzel was soon followed by Villano vs. United States, 310 F. 2d
680, 683, (10th Cir. 1962). In Villano, police officers seized two
notebooks from a desk in the defendant's place of employment;
the defendant did not claim ownership of either; he asserted that
several employees (including himself) used the notebooks. The
Court held that the employee had a protected interest and that
there also was an invasion of privacy. Both Henzel and Villano
considered also the fact that the search and seizure were
"directed at" the moving defendant. Henzel vs. United States, 296
F. 2d at 682; Villano vs. United States, 310 F. 2d at 683.
In a case in which an attorney closed his law office, placed his
files in storage and went to Puerto Rico, the Court of Appeals for
the Eighth Circuit recognized his standing to move to quash as
unreasonable search and seizure under the Fourth Amendment of
the U.S. Constitution a grand jury subpoena duces tecum directed
to the custodian of his files. The Government contended that the
petitioner had no standing because the books and papers were
physically in the possession of the custodian, and because the
subpoena was directed against the custodian. The court rejected
the contention, holding that
Schwimmer legally had such possession, control and
unrelinquished personal rights in the books and papers
as not to enable the question of unreasonable search
and seizure to be escaped through the mere procedural
device of compelling a third-party naked possessor to
produce and deliver them. Schwimmer vs. United
States, 232 F. 2d 855, 861 (8th Cir. 1956).
Aggrieved person doctrine where the search warrant s primarily
directed against said person gives "standing."
The latest United States decision squarely in point is United
States vs. Birrell, 242 F. Supp. 191 (1965, U.S.D.C. S.D.N.Y.).
The defendant had stored with an attorney certain files and
papers, which attorney, by the name of Dunn, was not, at the time
of the seizing of the records, Birrell's attorney. * Dunn, in turn, had
stored most of the records at his home in the country and on a
farm which, according to Dunn's affidavit, was under his (Dunn's)
"control and management." The papers turned out to be private,
personal and business papers together with corporate books and
records of certain unnamed corporations in which Birrell did not
even claim ownership. (All of these type records were seized in
the case at bar). Nevertheless, the search in Birrell was held
invalid by the court which held that even though Birrell did not
own the premises where the records were stored, he had
"standing" to move for the return of all the papers and properties
seized. The court, relying on Jones vs. U.S., supra; U.S. vs.
Antonelli Fireworks Co., 53 F. Supp. 870, Aff'd 155 F. 2d 631:
Henzel vs. U.S., supra; and Schwimmer vs. U.S., supra, pointed
out that
It is overwhelmingly established that the searches here
in question were directed solely and exclusively against
Birrell. The only person suggested in the papers as
having violated the law was Birrell. The first search
warrant described the records as having been used "in
committing a violation of Title 18, United States Code,
Section 1341, by the use of the mails by one Lowell M.

VOLENTI NON FIT INJURIA

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Birrell, . . ." The second search warrant was captioned:

"United States of America vs. Lowell M. Birrell. (p. 198)

clauses of the constitutional proscription on illegal searches and

seizures do not withhold the mantle of their protection from cases
not criminal in origin or nature.

Possession (actual or constructive), no less than

ownership, gives standing to move to suppress. Such
was the rule even before Jones. (p. 199)
If, as thus indicated Birrell had at least constructive
possession of the records stored with Dunn, it matters
not whether he had any interest in the premises
searched. See also Jeffers v. United States, 88 U.S.
Appl. D.C. 58, 187 F. 2d 498 (1950), affirmed 432 U.S.
48, 72 S. Ct. 93, 96 L. Ed. 459 (1951).
The ruling in the Birrell case was reaffirmed on motion for
reargument; the United States did not appeal from this decision.
The factual situation in Birrell is strikingly similar to the case of the
present petitioners; as in Birrell, many personal and corporate
papers were seized from premises not petitioners' family
residences; as in Birrell, the searches were "PRIMARILY
DIRECTED SOLETY AND EXCLUSIVELY" against the
petitioners. Still both types of documents were suppressed in
Birrell because of the illegal search. In the case at bar, the
petitioners connection with the premises raided is much closer
than in Birrell.
Thus, the petitioners have full standing to move for the quashing
of all the warrants regardless whether these were directed against
residences in the narrow sense of the word, as long as the
documents were personal papers of the petitioners or (to the
extent that they were corporate papers) were held by them in a
personal capacity or under their personal control.
Prescinding a from the foregoing, this Court, at all events, should
order the return to the petitioners all personal and private papers
and effects seized, no matter where these were seized, whether
from their residences or corporate offices or any other place or
places. The uncontradicted sworn statements of the petitioners in
their, various pleadings submitted to this Court indisputably show
that amongst the things seized from the corporate offices and
other places were personal and private papers and effects
belonging to the petitioners.
If there should be any categorization of the documents, papers
and things which where the objects of the unlawful searches and
seizures, I submit that the grouping should be: (a) personal or
private papers of the petitioners were they were unlawfully seized,
be it their family residences offices, warehouses and/or premises
owned and/or possessed (actually or constructively) by them as
shown in all the search and in the sworn applications filed in
securing the void search warrants and (b) purely corporate papers
belonging to corporations. Under such categorization or grouping,
the determination of which unlawfully seized papers, documents
and things are personal/private of the petitioners or purely
corporate papers will have to be left to the lower courts which
issued the void search warrants in ultimately effecting the
suppression and/or return of the said documents.
And as unequivocally indicated by the authorities above cited, the
petitioners likewise have clear legal standing to move for the
suppression of purely corporate papers as "President and/or
General Manager" of the corporations involved as specifically
mentioned in the void search warrants.
Finally, I must articulate my persuasion that although the cases
cited in my disquisition were criminal prosecutions, the great

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EN BANC
[G.R. No. L-32409. February 27, 1971.]
BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN,
Petitioners, v. HON. JUDGE VIVENCIO M. RUIZ, MISAEL P.
VERA, in his capacity as Commissioner of Internal Revenue,
ARTURO LOGRONIO, RODOLFO DE LEON, GAVINO
VELASQUEZ, MIMIR DELLOSA, NICANOR ALCORDO, JOHN
DOE, JOHN DOE, JOHN DOE, and JOHN DOE, Respondents.
San Juan, Africa, Gonzales & San Agustin, for Petitioners.
Solicitor General Felix Q. Antonio, Assistant Solicitor General
Crispin V . Bautista, Solicitor Pedro A. Ramirez and Special
Attorney Jaime M. Maza for Respondents.

DECISION
VILLAMOR, J.:

This is an original action of certiorari, prohibition and mandamus,

with prayer for a writ of preliminary mandatory and prohibitory
injunction. In their petition Bache & Co. (Phil.), Inc., a corporation
duly organized and existing under the laws of the Philippines, and
its President, Frederick E. Seggerman, pray this Court to declare
null and void Search Warrant No. 2-M-70 issued by respondent
Judge on February 25, 1970; to order respondents to desist from
enforcing the same and/or keeping the documents, papers and
effects seized by virtue thereof, as well as from enforcing the tax
assessments on petitioner corporation alleged by petitioners to
have been made on the basis of the said documents, papers and
effects, and to order the return of the latter to petitioners. We gave
due course to the petition but did not issue the writ of preliminary
injunction prayed for therein.
The pertinent facts of this case, as gathered from record, are as
follows:chanrob1es
virtual
1aw
library
On February 24, 1970, respondent Misael P. Vera, Commissioner
of Internal Revenue, wrote a letter addressed to respondent
Judge Vivencio M. Ruiz requesting the issuance of a search
warrant against petitioners for violation of Section 46(a) of the
National Internal Revenue Code, in relation to all other pertinent
provisions thereof, particularly Sections 53, 72, 73, 208 and 209,
and authorizing Revenue Examiner Rodolfo de Leon, one of
herein respondents, to make and file the application for search
warrant which was attached to the letter.
In the afternoon of the following day, February 25, 1970,
respondent De Leon and his witness, respondent Arturo Logronio,
went to the Court of First Instance of Rizal. They brought with
them the following papers: respondent Veras aforesaid letterrequest; an application for search warrant already filled up but still
unsigned by respondent De Leon; an affidavit of respondent
Logronio subscribed before respondent De Leon; a deposition in
printed form of respondent Logronio already accomplished and
signed by him but not yet subscribed; and a search warrant
already accomplished but still unsigned by respondent Judge.
At that time respondent Judge was hearing a certain case; so, by
means of a note, he instructed his Deputy Clerk of Court to take
the depositions of respondents De Leon and Logronio. After the
session had adjourned, respondent Judge was informed that the
depositions had already been taken. The stenographer, upon
request of respondent Judge, read to him her stenographic notes;
and thereafter, respondent Judge asked respondent Logronio to
take the oath and warned him that if his deposition was found to

be false and without legal basis, he could be charged for perjury.

Respondent Judge signed respondent de Leons application for
search warrant and respondent Logronios deposition, Search
Warrant No. 2-M-70 was then sign by respondent Judge and
accordingly issued.
Three days later, or on February 28, 1970, which was a Saturday,
the BIR agents served the search warrant petitioners at the
offices of petitioner corporation on Ayala Avenue, Makati, Rizal.
Petitioners lawyers protested the search on the ground that no
formal complaint or transcript of testimony was attached to the
warrant. The agents nevertheless proceeded with their search
which yielded six boxes of documents.
On March 3, 1970, petitioners filed a petition with the Court of
First Instance of Rizal praying that the search warrant be
quashed, dissolved or recalled, that preliminary prohibitory and
mandatory writs of injunction be issued, that the search warrant
be declared null and void, and that the respondents be ordered to
pay petitioners, jointly and severally, damages and attorneys
fees. On March 18, 1970, the respondents, thru the Solicitor
General, filed an answer to the petition. After hearing, the court,
presided over by respondent Judge, issued on July 29, 1970, an
order dismissing the petition for dissolution of the search warrant.
In the meantime, or on April 16, 1970, the Bureau of Internal
Revenue made tax assessments on petitioner corporation in the
total sum of P2,594,729.97, partly, if not entirely, based on the
documents thus seized. Petitioners came to this Court.
The petition should
reasons:chanrob1es

be granted
virtual

1. Respondent Judge failed

complainant and his witness.

to

for the
1aw

personally

following
library

examine

the

The pertinent provisions of the Constitution of the Philippines and

of the Revised Rules of Court are:jgc:chanrobles.com.ph
"(3) The right of the people to be secure in their persons, houses,
papers and effects against unreasonable searches and seizures
shall not be violated, and no warrants shall issue but upon
probable cause, to be determined by the judge after examination
under oath or affirmation of the complainant and the witnesses he
may produce, and particularly describing the place to be
searched, and the persons or things to be seized." (Art. III, Sec. 1,
Constitution.)
"SEC. 3. Requisites for issuing search warrant. A search
warrant shall not issue but upon probable cause in connection
with one specific offense to be determined by the judge or justice
of the peace after examination under oath or affirmation of the
complainant and the witnesses he may produce, and particularly
describing the place to be searched and the persons or things to
be seized.
"No search warrant shall issue for more than one specific offense.
"SEC. 4. Examination of the applicant. The judge or justice of
the peace must, before issuing the warrant, personally examine
on oath or affirmation the complainant and any witnesses he may
produce and take their depositions in writing, and attach them to
the record, in addition to any affidavits presented to him." (Rule
126, Revised Rules of Court.)
The examination of the complainant and the witnesses he may
produce, required by Art. III, Sec. 1, par. 3, of the Constitution,
and by Secs. 3 and 4, Rule 126 of the Revised Rules of Court,
should be conducted by the judge himself and not by others. The

VOLENTI NON FIT INJURIA

CORPORATION LAW | 39

phrase "which shall be determined by the judge after examination

under oath or affirmation of the complainant and the witnesses he
may produce," appearing in the said constitutional provision, was
introduced by Delegate Francisco as an amendment to the draft
submitted by the Sub-Committee of Seven. The following
discussion in the Constitutional Convention (Laurel, Proceedings
of the Philippine Constitutional Convention, Vol. III, pp. 755-757)
is enlightening:jgc:chanrobles.com.ph
"SR. ORENSE. Vamos a dejar compaero los piropos y vamos al
grano.
En los casos de una necesidad de actuar inmediatamente para
que no se frusten los fines de la justicia mediante el registro
inmediato y la incautacion del cuerpo del delito, no cree Su
Seoria que causaria cierta demora el procedimiento apuntado
en su enmienda en tal forma que podria frustrar los fines de la
justicia o si Su Seoria encuentra un remedio para esto casos
con el fin de compaginar los fines de la justicia con los derechos
del individuo en su persona, bienes etcetera, etcetera.
"SR. FRANCISCO. No puedo ver en la practica el caso hipottico
que Su Seoria pregunta por la siguiente razon: el que solicita un
mandamiento de registro tiene que hacerlo por escrito y ese
escrito no aparecer en la Mesa del Juez sin que alguien vaya el
juez a presentar ese escrito o peticion de sucuestro. Esa persona
que presenta el registro puede ser el mismo denunciante o
alguna persona que solicita dicho mandamiento de registro.
Ahora toda la enmienda en esos casos consiste en que haya
peticion de registro y el juez no se atendra solamente a sea
peticion sino que el juez examiner a ese denunciante y si tiene
testigos
tambin
examiner
a
los
testigos.
"SR. ORENSE. No cree Su Seoria que el tomar le declaracion
de ese denunciante por escrito siempre requeriria algun tiempo?.
"SR. FRANCISCO. Seria cuestio de un par de horas, pero por
otro lado minimizamos en todo lo posible las vejaciones injustas
con la expedicion arbitraria de los mandamientos de registro.
Creo que entre dos males debemos escoger. el menor.

by respondent Judge of the complainant (respondent De Leon)

and his witness (respondent Logronio). While it is true that the
complainants application for search warrant and the witness
printed-form deposition were subscribed and sworn to before
respondent Judge, the latter did not ask either of the two any
question the answer to which could possibly be the basis for
determining whether or not there was probable cause against
herein petitioners. Indeed, the participants seem to have attached
so little significance to the matter that notes of the proceedings
before respondent Judge were not even taken. At this juncture it
may be well to recall the salient facts. The transcript of
stenographic notes (pp. 61-76, April 1, 1970, Annex J-2 of the
Petition) taken at the hearing of this case in the court below
shows that per instruction of respondent Judge, Mr. Eleodoro V.
Gonzales, Special Deputy Clerk of Court, took the depositions of
the complainant and his witness, and that stenographic notes
thereof were taken by Mrs. Gaspar. At that time respondent Judge
was at the sala hearing a case. After respondent Judge was
through with the hearing, Deputy Clerk Gonzales, stenographer
Gaspar, complainant De Leon and witness Logronio went to
respondent Judges chamber and informed the Judge that they
had finished the depositions. Respondent Judge then requested
the stenographer to read to him her stenographic notes. Special
Deputy Clerk Gonzales testified as follows:jgc:chanrobles.com.ph
"A And after finishing reading the stenographic notes, the
Honorable Judge requested or instructed them, requested Mr.
Logronio to raise his hand and warned him if his deposition will be
found to be false and without legal basis, he can be charged
criminally for perjury. The Honorable Court told Mr. Logronio
whether he affirms the facts contained in his deposition and the
affidavit
executed
before
Mr.
Rodolfo
de
Leon.

"Q And thereafter?

"A And thereafter, he signed the deposition of Mr. Logronio.
"Q Who is this he?
"A The Honorable Judge.

"MR. LAUREL. . . . The reason why we are in favor of this

amendment is because we are incorporating in our constitution
something of a fundamental character. Now, before a judge could
issue a search warrant, he must be under the obligation to
examine personally under oath the complainant and if he has any
witness, the witnesses that he may produce . . ."cralaw virtua1aw
library
The implementing rule in the Revised Rules of Court, Sec. 4, Rule
126, is more emphatic and candid, for it requires the judge, before
issuing a search warrant, to "personally examine on oath or
affirmation the complainant and any witnesses he may produce . .
."cralaw
virtua1aw
library
Personal examination by the judge of the complainant and his
witnesses is necessary to enable him to determine the existence
or non-existence of a probable cause, pursuant to Art. III, Sec. 1,
par. 3, of the Constitution, and Sec. 3, Rule 126 of the Revised
Rules of Court, both of which prohibit the issuance of warrants
except "upon probable cause." The determination of whether or
not a probable cause exists calls for the exercise of judgment
after a judicial appraisal of facts and should not be allowed to be
delegated in the absence of any rule to the contrary.
In the case at bar, no personal examination at all was conducted

"Q The deposition or the affidavit?

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

Thereafter, respondent Judge signed the search warrant.

The participation of respondent Judge in the proceedings which
led to the issuance of Search Warrant No. 2-M-70 was thus
limited to listening to the stenographers readings of her notes, to
a few words of warning against the commission of perjury, and to
administering the oath to the complainant and his witness. This
cannot be consider a personal examination. If there was an
examination at all of the complainant and his witness, it was the
one conducted by the Deputy Clerk of Court. But, as stated, the
Constitution and the rules require a personal examination by the
judge. It was precisely on account of the intention of the delegates
to the Constitutional Convention to make it a duty of the issuing
judge to personally examine the complainant and his witnesses
that the question of how much time would be consumed by the
judge in examining them came up before the Convention, as can
be seen from the record of the proceedings quoted above. The
reading of the stenographic notes to respondent Judge did not
constitute sufficient compliance with the constitutional mandate
and the rule; for by that manner respondent Judge did not have
the opportunity to observe the demeanor of the complainant and
his witness, and to propound initial and follow-up questions which

VOLENTI NON FIT INJURIA

CORPORATION LAW | 40

the judicial mind, on account of its training, was in the best

position to conceive. These were important in arriving at a sound
inference on the all-important question of whether or not there
was probable cause.
2. The search warrant was issued for more than one specific
offense.
Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec.
46(a) of the National Internal Revenue Code in relation to all other
pertinent provisions thereof particularly Secs. 53, 72, 73, 208 and
209." The question is: Was the said search warrant issued "in
connection with one specific offense," as required by Sec. 3, Rule
126?

specific offense," in what is now Sec. 3, Rule 126. Thus we said in

Stonehill:jgc:chanrobles.com.ph
"Such is the seriousness of the irregularities committed in
connection with the disputed search warrants, that this Court
deemed it fit to amend Section 3 of Rule 122 of the former Rules
of Court that a search warrant shall not issue but upon probable
cause in connection with one specific offense. Not satisfied with
this qualification, the Court added thereto a paragraph, directing
that no search warrant shall issue for more than one specific
offense."
3. The search warrant does not particularly describe the things to
be seized.

To arrive at the correct answer it is essential to examine closely

the provisions of the Tax Code referred to above. Thus we find the
following:chanrob1es vi

The documents, papers and effects sought to be seized are

described in Search Warrant No. 2-M-70 in this
manner:jgc:chanrobles.com.ph

Sec. 46(a) requires the filing of income tax returns by

corporations.

"Unregistered and private books of accounts (ledgers, journals,

columnars, receipts and disbursements books, customers
ledgers); receipts for payments received; certificates of stocks
and securities; contracts, promissory notes and deeds of sale;
telex and coded messages; business communications,
accounting and business records; checks and check stubs;
records of bank deposits and withdrawals; and records of foreign
remittances, covering the years 1966 to 1970."cralaw virtua1aw
library

Sec. 53 requires the withholding of income taxes at source.

Sec. 72 imposes surcharges for failure to render income tax
returns and for rendering false and fraudulent returns.
Sec. 73 provides the penalty for failure to pay the income tax, to
make a return or to supply the information required under the Tax
Code.
Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks,
compounds, or manufactures any article subject to a specific tax,
without having paid the privilege tax therefore, or who aids or
abets in the conduct of illicit distilling, rectifying, compounding, or
illicit manufacture of any article subject to specific tax . . .," and
provides that in the case of a corporation, partnership, or
association, the official and/or employee who caused the violation
shall be responsible.
Sec. 209 penalizes the failure to make a return of receipts, sales,
business, or gross value of output removed, or to pay the tax due
thereon.
The search warrant in question was issued for at least four
distinct offenses under the Tax Code. The first is the violation of
Sec. 46(a), Sec. 72 and Sec. 73 (the filing of income tax returns),
which are interrelated. The second is the violation of Sec. 53
(withholding of income taxes at source). The third is the violation
of Sec. 208 (unlawful pursuit of business or occupation); and the
fourth is the violation of Sec. 209 (failure to make a return of
receipts, sales, business or gross value of output actually
removed or to pay the tax due thereon). Even in their
classification the six above-mentioned provisions are embraced in
two different titles: Secs. 46(a), 53, 72 and 73 are under Title II
(Income Tax); while Secs. 208 and 209 are under Title V
(Privilege Tax on Business and Occupation).
Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L19550, June 19, 1967 (20 SCRA 383), is not applicable, because
there the search warrants were issued for "violation of Central
Bank Laws, Internal Revenue (Code) and Revised Penal Code;"
whereas, here Search Warrant No 2-M-70 was issued for violation
of only one code, i.e., the National Internal Revenue Code. The
distinction more apparent than real, because it was precisely on
account of the Stonehill incident, which occurred sometime before
the present Rules of Court took effect on January 1, 1964, that
this Court amended the former rule by inserting therein the phrase
"in connection with one specific offense," and adding the
sentence "No search warrant shall issue for more than one

The description does not meet the requirement in Art III, Sec. 1, of
the Constitution, and of Sec. 3, Rule 126 of the Revised Rules of
Court, that the warrant should particularly describe the things to
be seized.
In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto
Concepcion, said:jgc:chanrobles.com.ph
"The grave violation of the Constitution made in the application for
the contested search warrants was compounded by the
description therein made of the effects to be searched for and
seized,
to
wit:chanrob1es
virtual
1aw
library
Books of accounts, financial records, vouchers, journals,
correspondence, receipts, ledgers, portfolios, credit journals,
typewriters, and other documents and/or paper showing all
business transactions including disbursement receipts, balance
sheets and related profit and loss statements.
"Thus, the warrants authorized the search for and seizure of
records pertaining to all business transactions of petitioners
herein, regardless of whether the transactions were legal or
illegal. The warrants sanctioned the seizure of all records of the
petitioners and the aforementioned corporations, whatever their
nature, thus openly contravening the explicit command of our Bill
of Rights that the things to be seized be particularly described
as well as tending to defeat its major objective: the elimination
of general warrants."cralaw virtua1aw library
While the term "all business transactions" does not appear in
Search Warrant No. 2-M-70, the said warrant nevertheless tends
to defeat the major objective of the Bill of Rights, i.e., the
elimination of general warrants, for the language used therein is
so all-embracing as to include all conceivable records of petitioner
corporation, which, if seized, could possibly render its business
inoperative.
In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this
Court had occasion to explain the purpose of the requirement that
the warrant should particularly describe the place to be searched
and the things to be seized, to wit:jgc:chanrobles.com.ph

VOLENTI NON FIT INJURIA

CORPORATION LAW | 41

". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec.
97) specifically require that a search warrant should particularly
describe the place to be searched and the things to be seized.
The evident purpose and intent of this requirement is to limit the
things to be seized to those, and only those, particularly described
in the search warrant to leave the officers of the law with no
discretion regarding what articles they shall seize, to the end that
unreasonable searches and seizures may not be made, that
abuses may not be committed. That this is the correct
interpretation of this constitutional provision is borne out by
American authorities."cralaw virtua1aw library
The purpose as thus explained could, surely and effectively, be
defeated under the search warrant issued in this case.
A search warrant may be said to particularly describe the things to
be seized when the description therein is as specific as the
circumstances will ordinarily allow (People v. Rubio; 57 Phil. 384);
or when the description expresses a conclusion of fact not of
law by which the warrant officer may be guided in making the
search and seizure (idem., dissent of Abad Santos, J.,); or when
the things described are limited to those which bear direct relation
to the offense for which the warrant is being issued (Sec. 2, Rule
126, Revised Rules of Court). The herein search warrant does not
conform to any of the foregoing tests. If the articles desired to be
seized have any direct relation to an offense committed, the
applicant must necessarily have some evidence, other than those
articles, to prove the said offense; and the articles subject of
search and seizure should come in handy merely to strengthen
such evidence. In this event, the description contained in the
herein disputed warrant should have mentioned, at least, the
dates, amounts, persons, and other pertinent data regarding the
receipts of payments, certificates of stocks and securities,
contracts, promissory notes, deeds of sale, messages and
communications, checks, bank deposits and withdrawals, records
of foreign remittances, among others, enumerated in the warrant.
Respondents contend that certiorari does not lie because
petitioners failed to file a motion for reconsideration of respondent
Judges order of July 29, 1970. The contention is without merit. In
the first place, when the questions raised before this Court are the
same as those which were squarely raised in and passed upon by
the court below, the filing of a motion for reconsideration in said
court before certiorari can be instituted in this Court is no longer a
prerequisite. (Pajo, etc., Et. Al. v. Ago, Et Al., 108 Phil., 905). In
the second place, the rule requiring the filing of a motion for
reconsideration before an application for a writ of certiorari can be
entertained was never intended to be applied without considering
the circumstances. (Matutina v. Buslon, Et Al., 109 Phil., 140.) In
the case at bar time is of the essence in view of the tax
assessments sought to be enforced by respondent officers of the
Bureau of Internal Revenue against petitioner corporation, On
account of which immediate and more direct action becomes
necessary. (Matute v. Court of Appeals, Et Al., 26 SCRA 768.)
Lastly, the rule does not apply where, as in this case, the
deprivation of petitioners fundamental right to due process taints
the proceeding against them in the court below not only with
irregularity but also with nullity. (Matute v. Court of Appeals, Et Al.,
supra.)
It is next contended by respondents that a corporation is not
entitled to protection against unreasonable search and seizures.
Again, we find no merit in the contention.
"Although, for the reasons above stated, we are of the opinion
that an officer of a corporation which is charged with a violation of
a statute of the state of its creation, or of an act of Congress
passed in the exercise of its constitutional powers, cannot refuse
to produce the books and papers of such corporation, we do not

wish to be understood as holding that a corporation is not entitled

to immunity, under the 4th Amendment, against unreasonable
searches and seizures. A corporation is, after all, but an
association of individuals under an assumed name and with a
distinct legal entity. In organizing itself as a collective body it
waives no constitutional immunities appropriate to such body. Its
property cannot be taken without compensation. It can only be
proceeded against by due process of law, and is protected, under
the 14th Amendment, against unlawful discrimination . . ." (Hale v.
Henkel,
201
U.S.
43,
50
L.
ed.
652.)
"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, i
was thought that a different rule applied to a corporation, the
ground that it was not privileged from producing its books and
papers. But the rights of a corporation against unlawful search
and seizure are to be protected even if the same result might
have been achieved in a lawful way." (Silverthorne Lumber
Company, Et. Al. v. United States of America, 251 U.S. 385, 64 L.
ed. 319.)
In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly
recognized the right of a corporation to object against
unreasonable searches and seizures, thus:jgc:chanrobles.com.ph
"As regards the first group, we hold that petitioners herein have
no cause of action to assail the legality of the contested warrants
and of the seizures made in pursuance thereof, for the simple
reason that said corporations have their respective personalities,
separate and distinct from the personality of herein petitioners,
regardless of the amount of shares of stock or the interest of each
of them in said corporations, whatever, the offices they hold
therein may be. Indeed, it is well settled that the legality of a
seizure can be contested only by the party whose rights have
been impaired thereby, and that the objection to an unlawful
search and seizure is purely personal and cannot be availed of by
third parties. Consequently, petitioners herein may not validly
object to the use in evidence against them of the documents,
papers and things seized from the offices and premises of the
corporations adverted to above, since the right to object to the
admission of said papers in evidence belongs exclusively to the
corporations, to whom the seized effects belong, and may not be
invoked by the corporate officers in proceedings against them in
their individual capacity . . ."cralaw virtua1aw library
In the Stonehill case only the officers of the various corporations
in whose offices documents, papers and effects were searched
and seized were the petitioners. In the case at bar, the
corporation to whom the seized documents belong, and whose
rights have thereby been impaired, is itself a petitioner. On that
score, petitioner corporation here stands on a different footing
from the corporations in Stonehill.
The tax assessments referred to earlier in this opinion were, if not
entirely as claimed by petitioners at least partly as in
effect admitted by respondents based on the documents
seized by virtue of Search Warrant No. 2-M-70. Furthermore, the
fact that the assessments were made some one and one-half
months after the search and seizure on February 25, 1970, is a
strong indication that the documents thus seized served as basis
for the assessments. Those assessments should therefore not be
enforced.
PREMISES CONSIDERED, the petition is granted. Accordingly,
Search Warrant No. 2-M-70 issued by respondent Judge is
declared null and void; respondents are permanently enjoined
from enforcing the said search warrant; the documents, papers
and effects seized thereunder are ordered to be returned to
petitioners; and respondent officials the Bureau of Internal
Revenue and their representatives are permanently enjoined from

VOLENTI NON FIT INJURIA

CORPORATION LAW | 42

enforcing the assessments mentioned in Annex "G" of the present

petition, as well as other assessments based on the documents,
papers and effects seized under the search warrant herein
nullified, and from using the same against petitioners in any
criminal or other proceeding. No pronouncement as to costs.
Concepcion, C.J., Dizon, Makalintal,
Teehankee and Makasiar, JJ., concur.
Reyes,

J.B.L.,

J.,

concurs

with

Zaldivar,

Mr.

Justice

Fernando,
Barredo.

Castro, J., concurs in the result.

Republic of the Philippines

SUPREME COURT
Manila

VOLENTI NON FIT INJURIA

CORPORATION LAW | 43

SECOND DIVISION
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.
SYNOPSIS
Upon failure of Rita Tapnio to pay her account with the Philippine
National Bank which was secured by a bond of the Philippine
American General Insurance Company, Inc. (PHILAMGEN), the
latter paid the same and then sued Rita Tapnio on their indemnity
agreement. Rita Tapnio filed a third party complaint against
petitioner Bank because, earlier, the bank, as mortgagee of her
sugar quota allocation for the year 1956-1957 at a reasonable
lease price and demanded parties to the lease contract to further
raise their consideration, the difference between the lease price
offered and that demanded by the Bank being a measly total of
P200.00. As a result thereof, Rita Tapnio failed to utilize her sugar
quota for that particular crop year and to realize an amount which
was more than enough to pay the balance of her indebtedness to
the bank which was secured and subsequently paid by the
bonding company. The trial court ordered the Philippine National
Bank to pay Rita Tapnio the same amounts she was ordered to
pay to the PHILAMGEN. This decision was affirmed by the Court
of Appeals.
The Supreme Court found no reasonable basis for the Board of
Directors of petitioner Bank to disapprove the lease contract
because of the measly sum of P200.00 and ruled that although
the Bank had the ultimate authority of approving or disapproving
the proposed lease, since the sugar quota was mortgaged to it, it
still had the responsibility of observing, for the protection and
interest of the mortgagor, that degree of care, precaution and
vigilance which the circumstances justly demand in approving or
disapproving the lease of said sugar quota.

SYLLABUS

1. MORTGAGES; RIGHT AND CORRESPONDING OBLIGATION

OF MORTGAGE. While a mortgagee bank has the authority of
approving or disapproving a proposed lease of sugar quota which
are mortgaged to it, it certainly cannot escape its responsibility of
observing, for the protection and interest of the mortgagor, that
degree of care, precaution and vigilance which the circumstances
justly demand in approving or disapproving the lease of said
sugar quota.
2. ID.; ID.; DAMAGES; LIABILITY UNDER ARTICLE 21 OF THE
NEW CIVIL CODE FOR FAILURE TO OBSERVE CARE AND
VIGILANCE UNDER ARTICLE 19 OF THE NEW CIVIL CODE.
The Philippine National Bank, as mortgagee of sugar quota
allegations, is liable for damages under Article 21 of the New Civil
Code for its failure to observe reasonable care and vigilance as
required under Article 19 of the New Civil Code, by refusing to
approve the lease of the mortgaged sugar quota for a measly

P200 difference in the lease price offered and the price

demanded by the Bank, and despite the fact that all the
mortgagors accounts with the Bank were secured and that she
had apparently the means to pay her obligation to the Bank.
3. CORPORATION LAW; LIABILITY FOR TORTS. The
Philippine National Bank, as 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
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,
therefor, 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
body."cralaw
virtua1aw
library
4. APPEALS; JURISDICTION OF THE SUPREME COURT.
The jurisdiction of the Supreme Court in a petition for review is
limited to reviewing only errors of law, accepting as conclusive the
factual findings of the Court of Appeals upon its own assessment
of the evidence.

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.

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CORPORATION LAW | 44

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 thirdparty 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

VOLENTI NON FIT INJURIA

CORPORATION LAW | 45

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. 8Bank, 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 for the
agricultural years from 1952 to 56. 1
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 evidence. 2
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

VOLENTI NON FIT INJURIA

CORPORATION LAW | 46

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 of allotments.
3
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 everyone his due, and observe
honesty and good faith, 4 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
provide in the statutes. 5

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 body." 6
WHEREFORE, in view of the foregoing, the decision of the Court
of Appeals is hereby AFFIRMED.
Fernando, Aquino, Concepcion, Jr., and Santos, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

VOLENTI NON FIT INJURIA

CORPORATION LAW | 47

G.R. No. L-35262

March 15, 1930

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellant,

vs.
TAN BOON KONG, defendant-appellee.
Attorney-General Jaranilla for appellant.
Alejandro de Aboitiz Pinaga for appellee.
SYLLABUS
1. CORPORATIONS; LIABILITY OF OFFICERS AND AGENTS.
A corporation can act only through its officers and agents, and
where the business itself involves a violation of the law, the
correct rule is that all who participate in it are liable.
2. ID.; ID.; CRIMINAL LIABILITY. The manager of a corporation
who fails to make true return of the corporations receipts and
sales in violation of sections 1458 and 2723 of the Administrative
Code, may be held criminally liable.
OSTRAND, J.:
This is an appeal from an order of the Judge of the Twenty-third
Judicial District sustaining to demurrer to an information charging
the defendant Tan Boon Kong with the violation of section 1458 of
Act No. 2711 as amended. The information reads as follows:
That on and during the four quarters of the year 1924,
in the municipality of Iloilo, Province of Iloilo, Philippine
Islands, the said accused, as corporation organized
under the laws of the Philippine Islands and engaged in
the purchase and the sale of sugar, "bayon," coprax,
and other native products and as such object to the
payment of internal-revenue taxes upon its sales, did
then and there voluntarily, illegally, and criminally
declare in 1924 for the purpose of taxation only the sum
of P2,352,761.94, when in truth and in fact, and the
accused well knew that the total gross sales of said
corporation
during
that
year
amounted
to
P2543,303.44, thereby failing to declare for the purpose
of taxation the amount of P190,541.50, and voluntarily
and illegally not paying the Government as internalrevenue percentage taxes the sum of P2,960.12,
corresponding to 1 per cent of said undeclared sales.

SEC. 2723. Failure to make true return of receipts and

sales. Any person who, being required by law to
make a return of the amount of his receipts, sales, or
business, shall fail or neglect to make such return within
the time required, shall be punished by a fine not
exceeding two thousand pesos or by imprisonment for
a term not exceeding one year, or both.
And any such person who shall make a false or
fraudulent return shall be punished by a fine not
exceeding ten thousand pesos or by imprisonment for a
term not exceeding two years, or both. (Act No. 2711.)
Apparently, the court below based the appealed ruling on the
ground that the offense charged must be regarded as committed
by the corporation and not by its officials or agents. This view is in
direct conflict with the great weight of authority. a corporation can
act only through its officers and agent s, and where the business
itself involves a violation of the law, the correct rule is that all who
participate in it are liable (Grall and Ostrand's Case, 103 Va., 855,
and authorities there cited.)
In case of State vs. Burnam (17 Wash., 199), the court went so
far as to hold that the manager of a diary corporation was
criminally liable for the violation of a statute by the corporation
through he was not present when the offense was committed.
In the present case the information or complaint alleges that he
defendant was the manager of a corporation which was engaged
in business as a merchant, and as such manager, he made a
false return, for purposes of taxation, of the total amount of sale
made by said false return constitutes a violation of law, the
defendant, as the author of the illegal act, must necessarily
answer for its consequences, provided that the allegation are
proven.
The ruling of the court below sustaining the demurrer to the
complaint is therefore reversed, and the case will be returned to
said court for further proceedings not inconsistent with our view
as hereinafter stated. Without costs. So ordered.
Johnson, Malcolm, Villamor, Johns, Romualdez and Villa-Real,
JJ., concur.

The question to be decided is whether the information sets forth

facts rendering the defendant, as manager of the corporation
liable criminally under section 2723 of Act No. 2711 for violation of
section 1458 of the same act for the benefit of said corporation.
Section 1458 and 2723 read as follows:
SEC. 1458. Payment of percentage taxes Quarterly
reports of earnings. The percentage taxes on
business shall be payable at the end of each calendar
quarter in the amount lawfully due on the business
transacted during each quarter; and it shall be on the
duty of every person conducting a business subject to
such tax, within the same period as is allowed for the
payment of the quarterly installments of the fixed taxes
without penalty, to make a true and complete return of
the amount of the receipts or earnings of his business
during the preceeding quarter and pay the tax due
thereon. . . . (Act No. 2711.)

Republic of the Philippines

SUPREME COURT
Manila

VOLENTI NON FIT INJURIA

CORPORATION LAW | 48

SECOND DIVISION
G.R. No. L-40324 October 5, 1988
JOSE O. SIA, petitioner,
vs.
COURT OF APPEALS and THE PEOPLE OF THE
PHILIPPINES, respondents.
PADILLA, J.:
The facts in this ease are not disputed. As stated by the Court of
Appeals in its assailed decision, * dated 29 November 1974, rendered
in CA-G.R. No. 12602-CR, they are as follows:
... on October 31, 1963 Jose O. Sia (appellant herein),
President and General Manager of the Metal Manufacturing of
the Philippines, Inc. for and in its behalf, applied for and was
granted a Letter of Credit (Exhibit "A") with the Continental
Bank, Manila to cover the importation of One Hundred (100)
pieces of Safe-Deposit Locks No. 4440, complete with keys,
amounting Pl,979.06. A marginal deposit was made with the
Bank and the Letter of Credit was confirmed with its foreign
correspondent. Thereafter, appellant, for and in behalf of the
Metal Manufacturing of the Philippines, Inc., executed a trust
receipt (Exhibit "C") in favor of the Continental Bank, the
terms and conditions of which read, in part, as follows:
... and in consideration thereof, I/We HEREBY AGREE
TO HOLD SAID GOODS IN TRUST FOR THE SAID
BANK as its property with liberty to sell the same for its
account but without any authority to make any other
disposition whatsoever of the said goods or any part
thereof (or the proceeds thereof) either by way of
conditional sale, pledge or otherwise.
In case of sale I/We further agree to hand the
proceeds as soon as received to the Bank to
apply against the relative accept instance (as
described above) and for the payment of any
other indebtedness of mine/ours to Continental
Bank.

obligation, or of the non-payment at

maturity of any acceptance specified
hereon or under any credit issued by the
Bank on my/our account, or of any
indebtedness on my/our part, all of my/our
obligations, acceptances, indebtedness,
and liabilities whatsoever shall thereupon
(with or without notice) mature and become
due and payable. ...
When the said trust receipt became due and
demandable, the Metal Manufacturing of the
Philippines, Inc. failed to pay or deliver the
merchandise to the Bank despite the latter's
1
demands (Exh. "D"). ...

Consequently, before the Court of First Instance of Manila,

Branch XI, an information for estafa was filed against petitioner for
violation of the trust receipt agreement executed by him in his
capacity as President and General Manager of Metal
Manufacturing of the Philippines, Inc. in favor of Continental Bank
(docketed as Criminal Case No. 77092).
Upon petitioner's plea of not guilty, trial proceeded. The trial court
entered a verdict of guilty beyond reasonable doubt for the
offense of estafa defined and penalized in paragraph 1(b), Article
315 of the Revised Penal Code, and sentenced the accused
(petitioner) to an indeterminate penalty of from One (1) Month and
One (1) Day of arresto mayor, as minimum, to One (1) Year of
prison correccional, as maximum, to indemnify the offended party
in the sum of P1,979.06 and to pay the costs.
Elevating the trial court's decision to the Court of Appeals
(docketed therein as CA G.R. No. 16026-CR), the conviction of
the accused, as aforestated, was affirmed with the modification to
the effect that the accused is to indemnify the offended party in
the sum of P1,278.65 only (after deducting the marginal deposit).
A motion for reconsideration followed, but was denied for lack of
merit. Hence, this petition for review on certiorari.
From the assignment of errors submitted by the petitioner, the
following issues are raised:

I/We agree to keep said goods insured to their full

value against fire and other casualties as directed
by the Bank, the sum insured to be payable in
case of loss to the Bank, with the understanding
that the Bank is not to be charged with the
storage, premium of insurance or any other
expenses incurred on said goods.

1) whether petitioner Sia, as President and General Manager of

Metal Manufacturing of the Phil., Inc. having acted for and on its
behalf in executing the Trust Receipt Agreement in favor of the
Continental Bank may be held liable for the crime charged; and

I/We also agree to keep the said goods,

manufactured products, or proceeds thereof,
whether in the form of money or bills, receivables
or accounts, separate and capable of
Identification as property of the Bank.

This case presents issues similar to those resolved by the Court

en banc in Sia vs. People. 2 The decision in the cited case calls
for a reversal of the respondent appellate court's herein appealed
judgment thereby resulting in the acquittal of the petitioner.

xxx xxx xxx

The Bank may at any time cancel this trust
and take possession of said goods or the
proceeds of the same as may then have
been sold wherever the said goods or
proceeds may then be found, and in the
event of any suspensions, or failure, or
assignment for the benefit of creditor on
my/our part or non-fulfillment of any

2) the real nature of a trust receipt agreement or transaction.

There is no further point is discussing the issues raised by

petitioner, as met by the respondents, because the Court's
decision in the earlier Sia case has preempted the subject
(although there are pronouncements in said decision which may
be open to question so much so that the decision was not
reached by a unanimous court).
It should be pointed out, however, that if the acts herein involved
occurred after 29 January 1975, petitioner would be criminally

VOLENTI NON FIT INJURIA

CORPORATION LAW | 49

liable for estafa under paragraph l(b), Article 315 of the Revised
Penal Code, pursuant to the following provisions of PD 115
Sec. 13. Penalty clause.The failure of an
entrustee to turn over the proceeds of the
sale of the goods, documents or, instruments
covered by a trust receipt to the extent of the
amount owing to the entruster or as appears
in the trust receipt or to return said goods,
documents or instruments if they were not
sold or disposed of in accordance with the
terms of the trust receipt shall constitute the
crime of estafa, punishable under the
provisions of Article Three hundred and
fifteen, paragraph one of Act Numbered
Three thousand eight hundred and fifteen, as
amended, otherwise known as the Revised
Penal Code. If the violation or offense is
committed by a corporation, partnership,
association or other juridical entities, the
penalty provided for in this Decree shall be
imposed upon the directors, officers,
employees or other officials or persons
therein responsible for the offense, without
prejudice to the civil liabilities arising from the
criminal offense. 3
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is
hereby GRANTED. The decision of the Court of Appeals is SET
ASIDE. Defendant is ACQUITTED without prejudice to the
institution of a civil action against the Metal Manufacturing of the
Phil., Inc. for collection of the sum due plus damages if any. No
costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-19190

November 29, 1922

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CORPORATION LAW | 50

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
VENANCIO CONCEPCION, defendant-appellant
MALCOLM, J.:
By telegrams and a letter of confirmation to the manager of the
Aparri branch of the Philippine National Bank, Venancio
Concepcion, President of the Philippine National Bank, between
April 10, 1919, and May 7, 1919, authorized an extension of credit
in favor of "Puno y Concepcion, S. en C." in the amount of
P300,000. This special authorization was essential in view of the
memorandum order of President Concepcion dated May 17,
1918, limiting the discretional power of the local manager at
Aparri, Cagayan, to grant loans and discount negotiable
documents to P5,000, which, in certain cases, could be increased
to P10,000. Pursuant to this authorization, credit aggregating
P300,000, was granted the firm of "Puno y Concepcion, S. en C.,"
the only security required consisting of six demand notes. The
notes, together with the interest, were taken up and paid by July
17, 1919.
"Puno y Concepcion, S. en C." was a copartnership capitalized at
P100,000. Anacleto Concepcion contributed P5,000; Clara Vda.
de Concepcion, P5,000; Miguel S. Concepcion, P20,000;
Clemente Puno, P20,000; and Rosario San Agustin, "casada con
Gral. Venancio Concepcion," P50,000. Member Miguel S.
Concepcion was the administrator of the company.
On the facts recounted, Venancio Concepcion, as President of the
Philippine National Bank and as member of the board of directors
of this bank, was charged in the Court of First Instance of
Cagayan with a violation of section 35 of Act No. 2747. He was
found guilty by the Honorable Enrique V. Filamor, Judge of First
Instance, and was sentenced to imprisonment for one year and
six months, to pay a fine of P3,000, with subsidiary imprisonment
in case of insolvency, and the costs.
Section 35 of Act No. 2747, effective on February 20, 1918, just
mentioned, to which reference must hereafter repeatedly be
made, reads as follows: "The National Bank shall not, directly or
indirectly, grant loans to any of the members of the board of
directors of the bank nor to agents of the branch banks." Section
49 of the same Act provides: "Any person who shall violate any of
the provisions of this Act shall be punished by a fine not to exceed
ten thousand pesos, or by imprisonment not to exceed five years,
or by both such fine and imprisonment." These two sections were
in effect in 1919 when the alleged unlawful acts took place, but
were repealed by Act No. 2938, approved on January 30, 1921.
Counsel for the defense assign ten errors as having been
committed by the trial court. These errors they have argued
adroitly and exhaustively in their printed brief, and again in oral
argument. Attorney-General Villa-Real, in an exceptionally
accurate and comprehensive brief, answers the proposition of
appellant one by one.
The question presented are reduced to their simplest elements in
the opinion which follows:
I. Was the granting of a credit of P300,000 to the copartnership
"Puno y Concepcion, S. en C." by Venancio Concepcion,
President of the Philippine National Bank, a "loan" within the
meaning of section 35 of Act No. 2747?

Counsel argue that the documents of record do not prove that

authority to make a loan was given, but only show the concession
of a credit. In this statement of fact, counsel is correct, for the
exhibits in question speak of a "credito" (credit) and not of a "
prestamo" (loan).
The "credit" of an individual means his ability to borrow money by
virtue of the confidence or trust reposed by a lender that he will
pay what he may promise. (Donnell vs. Jones [1848], 13 Ala.,
490; Bouvier's Law Dictionary.) A "loan" means the delivery by
one party and the receipt by the other party of a given sum of
money, upon an agreement, express or implied, to repay the sum
loaned, with or without interest. (Payne vs. Gardiner [1864], 29 N.
Y., 146, 167.) The concession of a "credit" necessarily involves
the granting of "loans" up to the limit of the amount fixed in the
"credit,"
II. Was the granting of a credit of P300,000 to the copartnership
"Puno y Concepcion, S. en C.," by Venancio Concepcion,
President of the Philippine National Bank, a "loan" or a
"discount"?
Counsel argue that while section 35 of Act No. 2747 prohibits the
granting of a "loan," it does not prohibit what is commonly known
as a "discount."
In a letter dated August 7, 1916, H. Parker Willis, then President
of the National Bank, inquired of the Insular Auditor whether
section 37 of Act No. 2612 was intended to apply to discounts as
well as to loans. The ruling of the Acting Insular Auditor, dated
August 11, 1916, was to the effect that said section referred to
loans alone, and placed no restriction upon discount transactions.
It becomes material, therefore, to discover the distinction between
a "loan" and a "discount," and to ascertain if the instant
transaction comes under the first or the latter denomination.
Discounts are favored by bankers because of their liquid nature,
growing, as they do, out of an actual, live, transaction. But in its
last analysis, to discount a paper is only a mode of loaning
money, with, however, these distinctions: (1) In a discount,
interest is deducted in advance, while in a loan, interest is taken
at the expiration of a credit; (2) a discount is always on doublename paper; a loan is generally on single-name paper.
Conceding, without deciding, that, as ruled by the Insular Auditor,
the law covers loans and not discounts, yet the conclusion is
inevitable that the demand notes signed by the firm "Puno y
Concepcion, S. en C." were not discount paper but were mere
evidences of indebtedness, because (1) interest was not
deducted from the face of the notes, but was paid when the notes
fell due; and (2) they were single-name and not double-name
paper.
The facts of the instant case having relation to this phase of
argument are not essentially different from the facts in
Binalbagan Estate case. Just as there it was declared that
operations constituted a loan and not a discount, so should
here lay down the same ruling.

the
the
the
we

III. Was the granting of a credit of P300,000 to the copartnership,

"Puno y Concepcion, S. en C." by Venancio Concepcion,
President of the Philippine National Bank, an "indirect loan" within
the meaning of section 35 of Act No. 2747?

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CORPORATION LAW | 51

Counsel argue that a loan to the partnership "Puno y Concepcion,

S. en C." was not an "indirect loan." In this connection, it should
be recalled that the wife of the defendant held one-half of the
capital of this partnership.
In the interpretation and construction of statutes, the primary rule
is to ascertain and give effect to the intention of the Legislature. In
this instance, the purpose of the Legislature is plainly to erect a
wall of safety against temptation for a director of the bank. The
prohibition against indirect loans is a recognition of the familiar
maxim that no man may serve two masters that where
personal interest clashes with fidelity to duty the latter almost
always suffers. If, therefore, it is shown that the husband is
financially interested in the success or failure of his wife's
business venture, a loan to partnership of which the wife of a
director is a member, falls within the prohibition.
Various provisions of the Civil serve to establish the familiar
relationship called a conjugal partnership. (Articles 1315, 1393,
1401, 1407, 1408, and 1412 can be specially noted.) A loan,
therefore, to a partnership of which the wife of a director of a bank
is a member, is an indirect loan to such director.
That it was the intention of the Legislature to prohibit exactly such
an occurrence is shown by the acknowledged fact that in this
instance the defendant was tempted to mingle his personal and
family affairs with his official duties, and to permit the loan
P300,000 to a partnership of no established reputation and
without asking for collateral security.
In the case of Lester and Wife vs. Howard Bank ([1870], 33 Md.,
558; 3 Am. Rep., 211), the Supreme Court of Maryland said:
What then was the purpose of the law when it declared
that no director or officer should borrow of the bank,
and "if any director," etc., "shall be convicted," etc., "of
directly or indirectly violating this section he shall be
punished by fine and imprisonment?" We say to protect
the stockholders, depositors and creditors of the bank,
against the temptation to which the directors and
officers might be exposed, and the power which as
such they must necessarily possess in the control and
management of the bank, and the legislature unwilling
to rely upon the implied understanding that in assuming
this relation they would not acquire any interest hostile
or adverse to the most exact and faithful discharge of
duty, declared in express terms that they should not
borrow, etc., of the bank.
In the case of People vs. Knapp ([1912], 206 N. Y., 373), relied
upon in the Binalbagan Estate decision, it was said:
We are of opinion the statute forbade the loan to his
copartnership firm as well as to himself directly. The
loan was made indirectly to him through his firm.

of the Act. It is contended, however, by the appellant, that the

repeal of these sections of Act No. 2747 by Act No. 2938 has
served to take away the basis for criminal prosecution.
This same question has been previously submitted and has
received an answer adverse to such contention in the cases of
United Stated vs. Cuna ([1908], 12 Phil., 241); People vs.
Concepcion ([1922], 43 Phil., 653); and Ong Chang Wing and
Kwong Fok vs. United States ([1910], 218 U. S., 272; 40 Phil.,
1046). In other words, it has been the holding, and it must again
be the holding, that where an Act of the Legislature which
penalizes an offense, such repeals a former Act which penalized
the same offense, such repeal does not have the effect of
thereafter depriving the courts of jurisdiction to try, convict, and
sentenced offenders charged with violations of the old law.
V. Was the granting of a credit of P300,000 to the copartnership
"Puno y Concepcion, S. en C." by Venancio Concepcion,
President of the Philippine National Bank, in violation of section
35 of Act No. 2747, penalized by this law?
Counsel argue that since the prohibition contained in section 35 of
Act No. 2747 is on the bank, and since section 49 of said Act
provides a punishment not on the bank when it violates any
provisions of the law, but on a person violating any provisions of
the same, and imposing imprisonment as a part of the penalty, the
prohibition contained in said section 35 is without penal
sanction.lawph!l.net
The answer is that when the corporation itself is forbidden to do
an act, the prohibition extends to the board of directors, and to
each director separately and individually. (People vs. Concepcion,
supra.)
VI. Does the alleged good faith of Venancio Concepcion,
President of the Philippine National Bank, in extending the credit
of P300,000 to the copartnership "Puno y Concepcion, S. en C."
constitute a legal defense?
Counsel argue that if defendant committed the acts of which he
was convicted, it was because he was misled by rulings coming
from the Insular Auditor. It is furthermore stated that since the
loans made to the copartnership "Puno y Concepcion, S. en C."
have been paid, no loss has been suffered by the Philippine
National Bank.
Neither argument, even if conceded to be true, is conclusive.
Under the statute which the defendant has violated, criminal intent
is not necessarily material. The doing of the inhibited act, inhibited
on account of public policy and public interest, constitutes the
crime. And, in this instance, as previously demonstrated, the acts
of the President of the Philippine National Bank do not fall within
the purview of the rulings of the Insular Auditor, even conceding
that such rulings have controlling effect.
Morse, in his work, Banks and Banking, section 125, says:

IV. Could Venancio Concepcion, President of the Philippine

National Bank, be convicted of a violation of section 35 of Act No.
2747 in relation with section 49 of the same Act, when these
portions of Act No. 2747 were repealed by Act No. 2938, prior to
the finding of the information and the rendition of the judgment?
As noted along toward the beginning of this opinion, section 49 of
Act No. 2747, in relation to section 35 of the same Act, provides a
punishment for any person who shall violate any of the provisions

It is fraud for directors to secure by means of their trust,

and advantage not common to the other stockholders.
The law will not allow private profit from a trust, and will
not listen to any proof of honest intent.
JUDGMENT

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CORPORATION LAW | 52

On a review of the evidence of record, with reference to the

decision of the trial court, and the errors assigned by the
appellant, and with reference to previous decisions of this court
on the same subject, we are irresistibly led to the conclusion that
no reversible error was committed in the trial of this case, and that
the defendant has been proved guilty beyond a reasonable doubt
of the crime charged in the information. The penalty imposed by
the trial judge falls within the limits of the punitive provisions of the
law.
Judgment is affirmed, with the costs of this instance against the
appellant. So ordered.
Araullo, C. J., Johnson, Street, Avancea, Villamor, Ostrand,
Johns, and Romualdez, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

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CORPORATION LAW | 53

G.R. Nos. 86883-85 January 29, 1993

PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
NORBERTO MANERO, JR., EDILBERTO MANERO, ELPIDIO
MANERO, SEVERINO LINES, RUDY LINES, EFREN
PLEAGO, ROGER BEDAO, RODRIGO ESPIA, ARSENIO
VILLAMOR, JR., JOHN DOE and PETER DOE, accused.
SEVERINO LINES, RUDY LINES, EFREN PLEAGO and
ROGER BENDAO, accused-appellants.
SYLLABUS
1.
REMEDIAL
LAW;
EVIDENCE;
ALIBI;
PHYSICAL
IMPOSSIBILITY TO BE AT THE CRIME SCENE AND TIME OF
COMMISSION MUST BE SHOWN. It is axiomatic that the
accused interposing the defense of alibi must not only be at some
other place but that it must also be physically impossible for him
to be at the scene of the crime at the time of its commission. It
has been the consistent ruling of this Court that no physical
impossibility exists in instances where it would take the accused
only fifteen to twenty minutes by jeep or tricycle, or some oneand-a half hours by foot, to traverse the distance between the
place where he allegedly was at the time of commission of the
offense and the scene of the crime. Recently, We ruled that there
can be no physical impossibility even if the distance between two
places is merely two (2) hours by bus. More important, it is wellsettled that the defense of alibi cannot prevail over the positive
identification of the authors of the crime by the prosecution
witnesses.
2. ID.; CONSPIRACY; DIRECT PROOF TO LINK ACCUSED
THERETO SHOWN IN CASE AT BAR. In the face of such
positive declarations that appellants were at the locus criminis
from 10:00 oclock in the morning up to about 5:00 oclock in the
afternoon, the alibi of appellants that they were somewhere else,
which is negative in nature, cannot prevail. The presence of
appellants in the eatery at Km. 125 having been positively
established, all doubts that they were not privy to the plot to
liquidate alleged communist sympathizers are therefore removed.
There was direct proof to link them to the conspiracy.
3. ID.; ID.; SHOWN BY SINGULARITY OF PURPOSE AND
UNITY IN EXECUTION OF CRIME. There is conspiracy when
two or more persons come to an agreement to commit a crime
and decide to commit it. It is not essential that all the accused
commit together each and every act constitutive of the offense. It
is enough that an accused participates in an act or deed where
there is singularity of purpose, and unity in its execution is
present.
4. ID.; ID.; ID.; CASE AT BAR. Appellants all assumed a
fighting stance to discourage if not prevent any attempt to provide
assistance to the fallen priest. They surrounded the house of
Domingo Gomez to stop Robles and the other occupants from
leaving so that the wounded Robles may die of hemorrhage.
Undoubtedly, these were overt acts to ensure success of the
commission of the crimes and in furtherance of the aims of the
conspiracy. The appellants acted in concert in the murder of Fr.
Favali and in the attempted murder of Rufino Robles. While
accused-appellants may not have delivered the fatal shots
themselves, their collective action showed a common intent to
commit
the
criminal
acts.
5. ID.; ID.; ID.; ACT OF ONE IS THE ACT OF ALL. Conspiracy
or action in concert to achieve a criminal design being sufficiently
shown, the act of one is the act of all the other conspirators, and

the precise extent or modality of participation of each of them

becomes
secondary.
6. CIVIL LAW; DAMAGES; MORAL; JURIDICAL PERSON
ENTITLED THERETO IF IT HAS A GOOD REPUTATION THAT IS
DEBASED. The award of moral damages in the amount of
P100,000.00 to the congregation, the Pontifical Institute of
Foreign Mission (PIME) Brothers, is not proper. There is nothing
on record which indicates that the deceased effectively severed
his civil relations with his family, or that he disinherited any
member thereof, when he joined his religious congregation. As a
matter of fact, Fr. Peter Geremias of the same congregation, who
was then a parish priest of Kidapawan, testified that "the religious
family belongs to the natural family of origin." Besides, as We
already held, a juridical person is not entitled to moral damages
because, not being a natural person, it cannot experience
physical suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish or moral shock. It is only when a
juridical person has a good reputation that is debased, resulting in
social humiliation, that moral damages may be awarded.
7. ID.; ID.; ID.; PROOF OF MORAL SUFFERING MUST BE
SHOWN. Neither can We award moral damages to the heirs of
the deceased who may otherwise be lawfully entitled thereto
pursuant to par. (3), Art. 2206, of the Civil Code, for the reason
that the heirs never presented any evidence showing that they
suffered mental anguish; much less did they take the witness
stand. It has been held that moral damages and their causal
relation to the defendants acts should be satisfactorily proved by
the claimant. It is elementary that in order that moral damages
may be awarded there must be proof of moral suffering.
8. ID.; ID.; EXEMPLARY; AWARDED TO LAWFUL HEIRS IN
CASE AT BAR EVEN IF IT IS NOT PROVED OR EXPRESSLY
PLEADED. However, considering that the brutal slaying of Fr.
Tulio Favali was attended with abuse of superior strength, cruelty
and ignominy by deliberately and inhumanly augmenting the pain
and anguish of the victim, outraging or scoffing at his person or
corpse, exemplary damages may be awarded to the lawful heirs,
even though not proved nor expressly pleaded in the complaint,
and the amount of P100,000.00 is considered reasonable.
BELLOSILLO, J.:
This was gruesome murder in a main thoroughfare an hour before
sundown. A hapless foreign religious minister was riddled with
bullets, his head shattered into bits and pieces amidst the
revelling of his executioners as they danced and laughed around
their quarry, chanting the tune "Mutya Ka Baleleng", a popular
regional folk song, kicking and scoffing at his prostrate, miserable,
spiritless figure that was gasping its last. Seemingly unsatiated
with the ignominy of their manslaughter, their leader picked up
pieces of the splattered brain and mockingly displayed them
before horrified spectators. Some accounts swear that acts of
cannibalism ensued, although they were not sufficiently
demonstrated. However, for their outrageous feat, the gangleader
already earned the monicker "cannibal priest-killer" But, what is
indubitable is that Fr. Tulio Favali 1 was senselessly killed for no
apparent reason than that he was one of the Italian Catholic
missionaries laboring in heir vineyard in the hinterlands of
Mindanao. 2
In the aftermath of the murder, police authorities launched a
massive manhunt which resulted in the capture of the
perpetrators except Arsenio Villamor, Jr., and two unidentified
persons who eluded arrest and still remain at large.

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CORPORATION LAW | 54

Informations for Murder, 3 Attempted Murder 4 and Arson 5 were

accordingly filed against those responsible for the frenzied orgy of
violence that fateful day of 11 April 1985. As these cases arose
from the same occasion, they were all consolidated in Branch 17
of the Regional Trial Court of Kidapawan, Cotabato. 6
After trial, the court a quo held
WHEREFORE . . . the Court finds the
accused Norberto Manero, Jr. alias
Commander Bucay, Edilberto Manero alias
Edil, Elpidio Manero, Severino Lines, Rudy
Lines, Rodrigo Espia alias Rudy, Efren
Pleago and Roger Bedao GUILTY beyond
reasonable doubt of the offense of Murder,
and with the aggravating circumstances of
superior strength and treachery, hereby
sentences each of them to a penalty of
imprisonment of reclusion perpetua; to pay
the Pontifical Institute of Foreign Mission
(PIME) Brothers, the congregation to which
Father Tulio Favali belonged, a civil indemnity
of P12,000.00; attorney's fees in the sum of
P50,000.00 for each of the eight (8) accused
or a total sum of P400,000.00; court
appearance fee of P10,000.00 for every day
the case was set for trial; moral damages in
the sum of P100,000.00; and to pay
proportionately the costs.
Further, the Court finds the accused Norberto
Manero, Jr. alias Commander Bucay GUILTY
beyond reasonable doubt of the offense of
Arson and with the application of the
Indeterminate
Sentence
Law,
hereby
sentences him to an indeterminate penalty of
imprisonment of not less than four (4) years,
nine (9) months, one (1) day of prision
correccional, as minimum, to six (6) years of
prision correccional, as maximum, and to
indemnify the Pontifical Institute of Foreign
Mission (PIME) Brothers, the congregation to
which Father Tulio Favali belonged, the sum
of P19,000.00 representing the value of the
motorcycle and to pay the costs.
Finally, the Court finds the accused Norberto
Manero, Jr., alias Commander Bucay,
Edilberto Manero alias Edil, Elpidio Manero,
Severino Lines, Rudy Lines, Rodrigo Espia
alias Rudy, Efren Pleago and Roger Bedao
GUILTY beyond reasonable doubt of the
offense of Attempted Murder and with the
application of the Indeterminate Sentence
Law, hereby sentences each of them to an
indeterminate penalty of imprisonment of not
less than two (2) years, four (4) months and
one (1) day of prision correccional, and
minimum, to eight (8) years and twenty (20)
days of prision mayor, as maximum, and to
pay the complainant Rufino Robles the sum
of P20,000.00 as attorney's fees and
P2,000.00 as court appearance fee for every
day of trial and to pay proportionately the
costs.

The foregoing penalties shall be served by

the said accused successively in the order of
their respective severity in accordance with
the provisions of Article 70 of the Revised
Penal Code, as amended. 7
From this judgment of conviction only accused Severino Lines,
Rudy Lines, Efren Pleago and Roger Bedao appealed with
respect to the cases for Murder and Attempted Murder. The
Manero brothers as well as Rodrigo Espia did not appeal; neither
did Norberto Manero, Jr., in the Arson case. Consequently, the
decision as against them already became final.
Culled from the records, the facts are: On 11 April 1985, around
10:00 o'clock in the morning, the Manero brothers Norberto Jr.,
Edilberto and Elpidio, along with Rodrigo Espia, Severino Lines,
Rudy Lines, Efren Pleago and Roger Bedao, were inside the
eatery of one Reynaldo Diocades at Km. 125, La Esperanza,
Tulunan, Cotabato. They were conferring with Arsenio Villamor,
Jr., private secretary to the Municipal Mayor of Tulunan, Cotabato,
and his two (2) unidentified bodyguards. Plans to liquidate a
number of suspected communist sympathizers were discussed.
Arsenio Villamor, Jr. scribbled on a cigarette wrapper the following
"NPA v. NPA, starring Fr. Peter, Domingo Gomez, Bantil, Fred
Gapate, Rene alias Tabagac and Villaning." "Fr. Peter" is Fr. Peter
Geremias, an Italian priest suspected of having links with the
communist movement; "Bantil" is Rufino Robles, a Catholic lay
leader who is the complaining witness in the Attempted Murder;
Domingo Gomez is another lay leader, while the others are simply
"messengers". On the same occasion, the conspirators agreed to
Edilberto Manero's proposal that should they fail to kill Fr. Peter
Geremias, another Italian priest would be killed in his stead. 8
At about 1:00 o'clock that afternoon, Elpidio Manero with two (2)
unidentified companions nailed a placard on a street-post beside
the eatery of Deocades. The placard bore the same inscriptions
as those found on the cigarette wrapper except for the additional
phrase "versus Bucay, Edil and Palo." Some two (2) hours later,
Elpidio also posted a wooden placard bearing the same message
on a street cross-sign close to the eatery. 9
Later, at 4:00 o'clock, the Manero brothers, together with Espia
and the four (4) appellants, all with assorted firearms, proceeded
to the house of "Bantil", their first intended victim, which was also
in the vicinity of Deocades' carinderia. They were met by "Bantil"
who confronted them why his name was included in the placards.
Edilberto brushed aside the query; instead, he asked "Bantil" if he
had any qualms about it, and without any provocation, Edilberto
drew his revolver and fired at the forehead of "Bantil". "Bantil" was
able to parry the gun, albeit his right finger and the lower portion
of his right ear were hit. Then they grappled for its possession
until "Bantil" was extricated by his wife from the fray. But, as he
was running away, he was again fired upon by Edilberto. Only his
trousers were hit. "Bantil" however managed to seek refuge in the
house of a certain Domingo Gomez. 10 Norberto, Jr., ordered his
men to surround the house and not to allow any one to get out so
that "Bantil" would die of hemorrhage. Then Edilberto went back
to the restaurant of Deocades and pistol-whipped him on the face
and accused him of being a communist coddler, while appellants
and their cohorts relished the unfolding drama. 11
Moments later, while Deocades was feeding his swine, Edilberto
strewed him with a burst of gunfire from his M-14 Armalite.
Deocades cowered in fear as he knelt with both hands clenched
at the back of his head. This again drew boisterous laughter and
ridicule from the dreaded desperados.

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CORPORATION LAW | 55

At 5:00 o'clock, Fr. Tulio Favali arrived at Km. 125 on board his
motorcycle. He entered the house of Gomez. While inside,
Norberto, Jr., and his co-accused Pleago towed the motorcycle
outside to the center of the highway. Norberto, Jr., opened the
gasoline tank, spilled some fuel, lit a fire and burned the
motorcycle. As the vehicle was ablaze, the felons raved and
rejoiced. 12
Upon seeing his motorcycle on fire, Fr. Favali accosted Norberto,
Jr. But the latter simply stepped backwards and executed a
thumbs-down signal. At this point, Edilberto asked the priest: "Ano
ang gusto mo, padre (What is it you want, Father)? Gusto mo,
Father, bukon ko ang ulo mo (Do you want me, Father, to break
your head)?" Thereafter, in a flash, Edilberto fired at the head of
the priest. As Fr. Favali dropped to the ground, his hands clasped
against his chest, Norberto, Jr., taunted Edilberto if that was the
only way he knew to kill a priest. Slighted over the remark,
Edilberto jumped over the prostrate body three (3) times, kicked it
twice, and fired anew. The burst of gunfire virtually shattered the
head of Fr. Favali, causing his brain to scatter on the road. As
Norberto, Jr., flaunted the brain to the terrified onlookers, his
brothers danced and sang "Mutya Ka Baleleng" to the delight of
their comrades-in-arms who now took guarded positions to isolate
the victim from possible assistance. 13
In seeking exculpation from criminal liability, appellants Severino
Lines, Rudy Lines, Efren Pleago and Roger Bedao contend
that the trial court erred in disregarding their respective defenses
of alibi which, if properly appreciated, would tend to establish that
there was no prior agreement to kill; that the intended victim was
Fr. Peter Geremias, not Fr. Tulio Favali; that there was only one
(1) gunman, Edilberto; and, that there was absolutely no showing
that appellants cooperated in the shooting of the victim despite
their proximity at the time to Edilberto.
But the evidence on record does not agree with the arguments of
accused-appellants.
On their defense of alibi, accused brothers Severino and Rudy
Lines claim that they were harvesting palay the whole day of 11
April 1985 some one kilometer away from the crime scene.
Accused Roger Bedao alleges that he was on an errand for the
church to buy lumber and nipa in M'lang, Cotabato, that morning
of 11 April 1985, taking along his wife and sick child for medical
treatment and arrived in La Esperanza, Tulunan, past noontime.
Interestingly, all appellants similarly contend that it was only after
they heard gunshots that they rushed to the house of Norberto
Manero, Sr., Barangay Captain of La Esperanza, where they were
joined by their fellow CHDF members and co-accused, and that it
was only then that they proceeded together to where the crime
took place at Km. 125.
It is axiomatic that the accused interposing the defense of alibi
must not only be at some other place but that it must also be
physically impossible for him to be at the scene of the crime at the
time of its commission. 14
Considering the failure of appellants to prove the required
physical impossibility of being present at the crime scene, as can
be readily deduced from the proximity between the places where
accused-appellants were allegedly situated at the time of the
commission of the offenses and the locus criminis, 15 the defense
of alibi is definitely feeble. 16 After all, it has been the consistent
ruling of this Court that no physical impossibility exists in
instances where it would take the accused only fifteen to twenty

minutes by jeep or tricycle, or some one-and-a-half hours by foot,

to traverse the distance between the place where he allegedly
was at the time of commission of the offense and the scene of the
crime. 17 Recently, we ruled that there can be no physical
impossibility even if the distance between two places is merely
two (2) hours by bus. 18 More important, it is well-settled that the
defense
of
alibi
cannot
prevail
over
the positive identification of the authors of the crime by the
prosecution witnesses. 19
In the case before Us, two (2) eyewitnesses, Reynaldo Deocades
and Manuel Bantolo, testified that they were both inside the
eatery at about 10:00 o'clock in the morning of 11 April 1985 when
the Manero brothers, together with appellants, first discussed their
plan to kill some communist sympathizers. The witnesses also
testified that they still saw the appellants in the company of the
Manero brothers at 4:00 o'clock in the afternoon when Rufino
Robles was shot. Further, at 5:00 o'clock that same afternoon,
appellants were very much at the scene of the crime, along with
the Manero brothers, when Fr. Favali was brutally murdered. 20
Indeed, in the face of such positive declarations that appellants
were at the locus criminis from 10:00 o'clock in the morning up to
about 5:00 o'clock in the afternoon, the alibi of appellants that
they were somewhere else, which is negative in nature, cannot
prevail. 21 The presence of appellants in the eatery at Km. 125
having been positively established, all doubts that they were not
privy to the plot to liquidate alleged communist sympathizers are
therefore removed. There was direct proof to link them to the
conspiracy.
There is conspiracy when two or more persons come to an
agreement to commit a crime and decide to commit it. 22 It is not
essential that all the accused commit together each and every act
constitutive of the offense. 23 It is enough that an accused
participates in an act or deed where there is singularity of
purpose, and unity in its execution is present. 24
The findings of the court a quo unmistakably show that there was
indeed a community of design as evidenced by the concerted acts
of all the accused. Thus
The other six accused, 25 all armed with high
powered firearms, were positively identified
with Norberto Manero, Jr. and Edilberto
Manero in the carinderia of Reynaldo
Deocades in La Esperanza, Tulunan,
Cotabato at 10:00 o'clock in the morning of
11 April 1985 morning . . . they were outside
of the carinderia by the window near the table
where Edilberto Manero, Norberto Manero,
Jr., Jun Villamor, Elpidio Manero and
unidentified members of the airborne from
Cotabato were grouped together. Later that
morning, they all went to the cockhouse
nearby to finish their plan and drink tuba.
They were seen again with Edilberto Manero
and Norberto Manero, Jr., at 4:00 o'clock in
the afternoon of that day near the house of
Rufino Robles (Bantil) when Edilberto
Manero shot Robles. They surrounded the
house of Domingo Gomez where Robles fled
and hid, but later left when Edilberto Manero
told them to leave as Robles would die of
hemorrhage. They followed Fr. Favali to
Domingo Gomez' house, witnessed and
enjoyed the burning of the motorcycle of Fr.
Favali and later stood guard with their
firearms ready on the road when Edilberto

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Manero shot to death Fr. Favali. Finally, they

joined Norberto Manero, Jr. and Edilberto
Manero in their enjoyment and merriment on
the death of the priest. 26
From the foregoing narration of the trial court, it is clear that
appellants were not merely innocent bystanders but were in fact
vital cogs in perpetrating the savage murder of Fr. Favali and the
attempted murder of Rufino Robles by the Manero brothers and
their militiamen. For sure, appellants all assumed a fighting
stance to discourage if not prevent any attempt to provide
assistance to the fallen priest. They surrounded the house of
Domingo Gomez to stop Robles and the other occupants from
leaving so that the wounded Robles may die of hemorrhage. 27
Undoubtedly, these were overt acts to ensure success of the
commission of the crimes and in furtherance of the aims of the
conspiracy. The appellants acted in concert in the murder of Fr.
Favali and in the attempted murder of Rufino Robles. While
accused-appellants may not have delivered the fatal shots
themselves, their collective action showed a common intent to
commit the criminal acts.
While it may be true that Fr. Favali was not originally the intended
victim, as it was Fr. Peter Geremias whom the group targetted for
the kill, nevertheless, Fr. Favali was deemed a good substitute in
the murder as he was an Italian priest. On this, the conspirators
expressly agreed. As witness Manuel Bantolo explained 28
Q Aside from those persons listed in that paper to be
killed, were there other persons who were to be
liquidated?

Q Rudy Lines.
A He also said "yes".
Q What do you mean "yes"?
A He also agreed and he was happy and said "yes" we
will kill him.
xxx xxx xxx
Q What about Efren Pleago?
A He also agreed and even commented
laughing "go ahead".
Q Roger Bedao, what was his reaction to that
suggestion that should they fail to kill Fr. Peter,
they will (sic) kill anybody provided he is an
Italian and if not, they will (sic) make Reynaldo
Deocades an example?
A He also agreed laughing.
Conspiracy or action in concert to achieve a criminal design being
sufficiently shown, the act of one is the act of all the other
conspirators,
and
the precise extent or modality of participation of each of them
becomes secondary. 30

A There were some others.

Q Who were they?
A They said that if they could not kill those persons
listed in that paper then they will (sic) kill anyone so
long as he is (sic) an Italian and if they could not kill the
persons they like to kill they will (sic) make Reynaldo
Deocades as their sample.
That appellants and their co-accused reached a common
understanding to kill another Italian priest in the event that Fr.
Peter Geremias could not be spotted was elucidated by Bantolo
thus 29
Q Who suggested that Fr. Peter be the first to be killed?
A All of them in the group.
Q What was the reaction of Norberto Manero with
respect to the plan to kill Fr. Peter?
A He laughed and even said, "amo ina" meaning "yes,
we will kill him ahead."
xxx xxx xxx
Q What about Severino Lines? What was his reaction?

The award of moral damages in the amount of P100,000.00 to the

congregation, the Pontifical Institute of Foreign Mission (PIME)
Brothers, is not proper. There is nothing on record which indicates
that the deceased effectively severed his civil relations with his
family, or that he disinherited any member thereof, when he joined
his religious congregation. As a matter of fact, Fr. Peter Geremias
of the same congregation, who was then a parish priest of
Kidapawan, testified that "the religious family belongs to the
natural family of origin." 31 Besides, as We already held, 32 a
juridical person is not entitled to moral damages because, not
being a natural person, it cannot experience physical suffering or
such sentiments as wounded feelings, serious anxiety, mental
anguish or moral shock. It is only when a juridical person has a
good reputation that is debased, resulting in social humiliation,
that moral damages may be awarded.
Neither can We award moral damages to the heirs of the
deceased who may otherwise be lawfully entitled thereto pursuant
to par. (3), Art. 2206, of the Civil Code, 33 for the reason that the
heirs never presented any evidence showing that they suffered
mental anguish; much less did they take the witness stand. It has
been held 34 that moral damages and their causal relation to the
defendant's acts should be satisfactorily proved by the claimant. It
is elementary that in order that moral damages may be awarded
there must be proof of moral suffering. 35 However, considering
that the brutal slaying of Fr. Tulio Favali was attended with abuse
of superior strength, cruelty and ignominy by deliberately and
inhumanly augmenting the pain and anguish of the victim,
outraging or scoffing at his person or corpse, exemplary damages
may be awarded to the lawful heirs, 36 even though not proved nor
expressly pleaded in the complaint, 37 and the amount of
P100,000.00 is considered reasonable.

A He also laughed and so conformed and agreed to it.

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With respect to the civil indemnity of P12,000.00 for the death of

Fr. Tulio Favali, the amount is increased to P50,000.00 in
accordance with existing jurisprudence, which should be paid to
the lawful heirs, not the PIME as the trial court ruled.
WHEREFORE, the judgment appealed from being in accord with
law and the evidence is AFFIRMED with the modification that the
civil indemnity which is increased from P12,000.00 to P50,000.00
is awarded to the lawful heirs of the deceased plus exemplary
damages of P100,000.00; however, the award of moral damages
is deleted.
Costs against accused-appellants.
SO ORDERED.
Cruz, Padilla and Grio-Aquino, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

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FIRST DIVISION
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. (hereafter ABS-CBN) seeks to reverse and
set aside the decision 1 of 31 October 1996 and the resolution 2 of
10 March 1997 of the Court of Appeals in CA-G.R. CV No. 44125.
The former affirmed with modification the decision 3 of 28 April
1993 of the Regional Trial Court (RTC) of Quezon City, Branch
80, in Civil Case No. Q-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 .

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.
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 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

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.

4. Tiger Command

Viva, through defendant Del Rosario, offered

ABS-CBN, through its vice-president Charo
Santos-Concio, a list of three(3) film
packages (36 title) from which ABS-CBN may
exercise its right of first refusal under the
afore-said agreement (Exhs. "1" par, 2, "2,"
"2-A'' and "2-B"-Viva). ABS-CBN, however
through Mrs. Concio, "can tick off only ten
(10) titles" (from the list) "we can purchase"
(Exh. "3" - Viva) and therefore did not accept
said list (TSN, June 8, 1992, pp. 9-10). The
titles ticked off by Mrs. Concio are not the
subject of the case at bar except the film
''Maging Sino Ka Man."

7. Batang Matadero

For further enlightenment, this rejection letter

dated January 06, 1992 (Exh "3" - Viva) is
hereby quoted:

5. Boy de Sabog
6. Lady Commando

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

6 January 1992
(Signed)
Dear Vic,

Charo Santos-C

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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 April 06, 1992, Del Rosario and Mr.
Graciano Gozon of RBS Senior vicepresident 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.
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 ABSCBN 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) including the fourteen (14) films
subject of the present case. 4
On 27 May 1992, ABS-CBN filed before the RTC a complaint for
specific performance with a prayer for a writ of preliminary
injunction and/or temporary restraining order against private
respondents Republic Broadcasting Corporation 5 (hereafter
RBS ), Viva Production (hereafter VIVA), and Vicente Del Rosario.
The complaint was docketed as Civil Case No. Q-92-12309.
On 27 May 1992, RTC issued a temporary restraining order 6
enjoining private respondents from proceeding with the airing,
broadcasting, and televising of the fourteen VIVA films subject of
the 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
order 7 directing the issuance of a writ of preliminary injunction
upon ABS-CBN's posting of P35 million bond. ABS-CBN moved
for the reduction of the bond, 8 while private respondents moved
for reconsideration of the order and offered to put up a
counterbound. 9
In the meantime, private respondents filed separate answers with
counterclaim. 10 RBS also set up a cross-claim against VIVA..
On 3 August 1992, the RTC issued an order 11 dissolving the writ
of preliminary injunction upon the posting by RBS of a P30 million
counterbond to answer for whatever damages ABS-CBN might
suffer by virtue of such dissolution. However, it reduced
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.
At the pre-trial 12 on 6 August 1992, the parties, upon suggestion
of the court, agreed to explore the possibility of an amicable
settlement. In the meantime, RBS prayed for and was granted
reasonable time within which to put up a P30 million counterbond
in the event that no settlement would be reached.
As the parties failed to enter into an amicable settlement RBS
posted on 1 October 1992 a counterbond, which the RTC
approved in its Order of 15 October 1992. 13
On 19 October 1992, ABS-CBN filed a motion for reconsideration
14
of the 3 August and 15 October 1992 Orders, which RBS
opposed. 15
On 29 October 1992, the RTC conducted a pre-trial. 16

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Pending resolution of its motion for reconsideration, ABS-CBN

filed with the Court of Appeals a petition 17 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 order 18 to enjoin the airing, broadcasting, and
televising of any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a
decision 19 dismissing the petition in 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 No. Q-192-1209. Thereafter, on 28 April 1993, it
rendered a decision 20 in favor of RBS and VIVA and against ABSCBN 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 the amount of P1
million;
d) P5 million as and by way of moral
damages;
e) P5 million as and by way of
exemplary damages;
(3) For 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.
On 21 June 1993, this Court denied 21 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 ABSCBN'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.

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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 twenty-four (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 ABSCBN exercised its right of refusal by rejecting
the offer of VIVA.. As aptly observed by the
trial court, with the said letter of Mrs. Concio
of January 6, 1992, ABS-CBN had lost its
right of first refusal. And even if We reckon
the fifteen (15) day period from February 27,
1992 (Exhibit 4 to 4-C) when another list was
sent to ABS-CBN after the letter of Mrs.
Concio, still the fifteen (15) day period within
which ABS-CBN shall exercise its right of first
refusal has already expired. 22
Accordingly, respondent court sustained the award 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 ABSCBN."
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 Sons Milling, Inc. v. Court of Appeals, 23 which cited
Toyota Shaw, Inc. v. Court of Appeals, 24 Ang Yu Asuncion v.
Court of Appeals, 25 and Villonco Realty Company v. Bormaheco.
Inc. 26
Anent the actual damages awarded to RBS, ABS-CBN disavows
liability therefor. RBS spent for the premium on the counterbond
of its own volition in order to negate the injunction issued by the
trial court after the parties had ventilated their respective positions
during the hearings for the purpose. The filing of the counterbond
was an option available to RBS, but it can hardly be argued that
ABS-CBN compelled RBS to incur such expense. Besides, RBS
had another available option, i.e., move for the dissolution 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 filing an
action. 27 In any case, free resort to courts for redress of wrongs is
a matter of public policy. The law recognizes the right of every
one to sue for that which he honestly believes to be his right
without fear of standing trial for damages where by lack of
sufficient evidence, legal technicalities, or a different interpretation

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of the laws on the matter, the case would lose ground. 28 One who
makes use of his own legal right does no injury. 29 If damage
results front the filing of the complaint, it is damnum absque
injuria. 30 Besides, moral damages are generally not awarded in
favor of a juridical person, unless it enjoys a good reputation that
was debased by the offending party resulting in social humiliation.

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.

31

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 in Buan v.
Camaganacan 32 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, attorney's fees shall not be recovered as cost." 33

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.

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, ABS-CBN must be held liable
for such damages. Citing Tolentino, 34 damages may be awarded
in cases of abuse of rights even if the 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 damages, private respondents RBS cited People v.
Manero, 35 where it was stated that such entity may recover moral
and exemplary damages if it has a good reputation that is
debased resulting in social humiliation. it then ratiocinates; thus:
There can be no doubt that RBS' reputation
has been debased by ABS-CBN's acts in this
case. When RBS was not able to fulfill its
commitment to the viewing public to show the

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
the competition. 36
For their part, VIVA and Vicente del Rosario contend that the
findings of fact of the trial court and the Court of Appeals do not
support ABS-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 render some service to another 37
for a consideration. there is no contract unless the following
requisites concur: (1) consent of the contracting parties; (2) object

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certain which is the subject of the contract; and (3) cause of the
obligation, which is established. 38 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 performance of the terms agreed
upon in the contract. 39
Contracts that are consensual in nature are perfected upon mere
meeting of the minds, Once there is concurrence between the
offer and the acceptance upon the subject matter, consideration,
and terms of payment a contract is produced. The offer must be
certain. To convert the offer into a contract, the acceptance must
be absolute and must not qualify the terms of the offer; it must be
plain, unequivocal, unconditional, and without variance of any sort
from the proposal. A qualified acceptance, or one that involves a
new proposal, constitutes a counter-offer and is a rejection of the
original offer. Consequently, when something is desired which is
not exactly what is proposed in the offer, such acceptance is not
sufficient to generate consent because any modification or
variation from the terms of the offer annuls the offer. 40
When Mr. Del Rosario of VIVA met 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 counter-proposal 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
Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is
misplaced. In these cases, it was held that an acceptance may
contain a request for certain changes in the terms of the offer and
yet be a binding acceptance as long as "it is clear that the
meaning of the acceptance is positively and unequivocally to
accept the offer, whether such request is granted or not." This
ruling was, however, reversed in the resolution of 29 March 1996,
43
which ruled that the acceptance of 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 Insurance Co. 44 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 amount to a rejection of the offer and the tender of a counteroffer." 45 However, when any of the elements of the contract is
modified upon acceptance, such alteration amounts to a counteroffer.

In the case at bar, ABS-CBN made no unqualified acceptance of

VIVA's offer. Hence, they underwent a period of bargaining. ABSCBN 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.
Under Corporation Code, 46 unless otherwise provided by said
Code, corporate powers, such as the power; to enter into
contracts; are exercised by the Board of Directors. However, the
Board may delegate such powers to either an executive
committee or officials or contracted managers. The delegation,
except for the executive committee, must be for specific
purposes, 47 Delegation to officers makes the latter agents of the
corporation; accordingly, the general rules of agency as to the
bindings
effects
of
their
acts
would
apply. 48 For such officers to be deemed fully clothed by the
corporation to exercise a power of the Board, the latter must
specially authorize them to do so. That Del Rosario did not have
the authority to accept ABS-CBN's counter-offer 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 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).

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THIRD, Mr. Lopez [sic] answer to question 29

of his affidavit testimony (Exh. "D") states:
We were able to reach an agreement.
VIVA gave us the exclusive license to
show these fourteen (14) films, and we
agreed to pay Viva the amount of
P16,050,000.00 as well as grant Viva
commercial slots worth P19,950,000.00.
We had already earmarked this P16,
050,000.00.
which gives a total consideration of P36
million (P19,950,000.00 plus P16,050,000.00.
equals P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q. What was written in this napkin?
A. The total price, the breakdown
the known Viva movies, the 7
blockbuster movies and the other 7
Viva movies because the price was
broken down accordingly. The
none [sic] Viva and the seven other
Viva movies and the sharing
between the cash portion and the
concerned spot portion in the total
amount of P35 million pesos.
Now, which is which? P36 million or P35
million? This weakens ABS-CBN's claim.
FOURTH. Mrs. Concio, testifying for ABSCBN 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 socalled 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

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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
(Exh. "7-1" - Viva ). 49
The contention that ABS-CBN had yet to fully exercise its right of
first refusal over twenty-four films under the 1990 Film Exhibition
Agreement and that the meeting between Lopez and Del Rosario
was a continuation of said previous contract is untenable. As
observed by the trial court, ABS-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
ABS-CBN, (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
pecuniary loss suffered by him as he has duly proved. 51 The
indemnification shall comprehend not only the value of the loss
suffered, but also that of the profits that the obligee failed to
obtain. 52 In contracts and quasi-contracts the damages which
may be awarded are dependent on whether the 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 obligation. 53 In crimes and quasidelicts, 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 could have reasonably been foreseen by the defendant. 54
Actual damages may likewise be recovered for loss or impairment
of earning capacity in cases of temporary or permanent personal
injury, or for injury to the plaintiff's business standing or
commercial credit. 55

The claim of RBS for actual damages did not arise from contract,
quasi-contract, delict, or quasi-delict. It arose from the fact of filing
of the complaint despite ABS-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 actual
damages in the amount of P6,621,195.32. 56
Needless to state the award of actual damages cannot be
comprehended under the above law on actual damages. RBS
could only probably take refuge under Articles 19, 20, and 21 of
the Civil Code, which read as follows:
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 recoverable from the
injunctive bond. 57 In this case, ABS-CBN had not yet filed the
required bond; as a matter of fact, it asked for reduction of the
bond and even went to the Court of Appeals to challenge the
order on the matter, Clearly then, it was not necessary for RBS to
file a counterbond. Hence, ABS-CBN cannot be held responsible
for the premium RBS paid for the counterbond.
Neither could ABS-CBN be liable for the print advertisements for
"Maging Sino Ka Man" for lack of sufficient legal basis. The RTC
issued a temporary restraining order and later, a writ of
preliminary injunction on the basis of its determination that there
existed sufficient ground for the issuance thereof. Notably, the
RTC did not dissolve the injunction on the ground of lack of legal
and factual basis, but because of the plea of RBS that it be
allowed to put up a counterbond.
As regards 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 any of the circumstances provided
for in Article 2208 of the Civil Code. 58
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 to litigate. 59 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 factual, legal, and
equitable justification. 60 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

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CORPORATION LAW | 66

showing of bad faith could be reflected in a party's persistence in

a case other than erroneous conviction of the righteousness of his
cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII,
Book IV of the Civil Code. Article 2217 thereof defines what are
included in moral damages, while Article 2219 enumerates the
cases where they may be recovered, Article 2220 provides that
moral damages may be recovered in breaches of contract where
the defendant acted fraudulently or in bad faith. 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 wrongdoer. 62 The award is not meant to
enrich the complainant at the expense of the defendant, but to
enable the injured party to obtain means, diversion, or
amusements that will serve to obviate then moral suffering he has
undergone. It is aimed at the restoration, within the limits of the
possible, of the spiritual status quo ante, and should be
proportionate to the suffering inflicted. 63 Trial courts must then
guard against the award of exorbitant damages; they should
exercise balanced restrained and measured objectivity to avoid
suspicion that it was due to passion, prejudice, or corruption on
the part of the trial court. 64

but which is contrary to morals, good custom, public order, or

public policy, and (3) and it is done with intent to injure. 72
Verily then, malice or bad faith is at the core of Articles 19, 20,
and 21. Malice or bad faith implies a conscious and intentional
design to do a wrongful act for a dishonest purpose or moral
obliquity. 73 Such must be substantiated by evidence. 74
There is no adequate proof that ABS-CBN was inspired by malice
or bad faith. It was honestly convinced of the merits of its cause
after it had undergone serious negotiations culminating in its
formal submission of a draft contract. Settled is the rule that the
adverse result of an action does not per se make the action
wrongful and subject the actor to damages, for the law could not
have meant to impose a penalty on the right to litigate. If
damages result from a person's exercise of a right, it is damnum
absque injuria. 75
WHEREFORE, the instant petition is GRANTED. The challenged
decision of the Court of Appeals in 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.

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 only by
one having a nervous system. 65 The statement in People v.
Manero 66 and Mambulao Lumber Co. v. PNB 67 that a corporation
may recover moral damages if it "has a good reputation that is
debased, resulting in social humiliation" is an obiter dictum. On
this score alone the award for damages must be set aside, since
RBS is a corporation.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

The basic law on exemplary damages is Section 5, Chapter 3,

Title XVIII, Book IV of the Civil Code. These are imposed by way
of example or correction for the public good, in addition to moral,
temperate, liquidated or compensatory damages. 68 They are
recoverable in criminal cases as part of the civil liability when the
crime was committed with one or more aggravating
circumstances; 69 in quasi-contracts, if the defendant acted with
gross negligence; 70 and in contracts and quasi-contracts, if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner. 71

G.R. No. L-6776

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.

1. CONSTITUTIONAL LAW RIGHT TO ACQUIRE LANDS

LIMITED TO FILIPINO CITIZENS; ACT 271 REPEALED BY
SECTION 5, ARTICLE XIII, OF THE CONSTITUTION. The
provisions of Act No. 271 of the old Philippine Commission which
allow all religious associations, of whatever sort or denomination,
whether incorporated in the Philippines or in the name of other
country, to hold land in the Philippines for religious purposes,
must be deemed repealed by the absolute term of section 5,
Article XIII, of the Constitution, which limit the acquisition of land
in the Philippines to its citizens, or to corporations or associations
at least sixty per centum of the capital stock of which is owned by
such citizens, adopted after the enactment of said Act No. 271.

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)

May 21, 1955

THE REGISTER OF DEEDS OF RIZAL, petitioner-appellee,

vs.
UNG SIU SI TEMPLE, respondent-appellant.

SYLLABUS

2. ID.; ID.; ID.; DEEP OF DONATION EXECUTED BY A FILIPINO

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CORPORATION LAW | 67

CITIZEN
IN
FAVOR
OF A FOREIGN
RELIGIOUS
ORGANIZATION CAN BE REGISTERED. In view of the
provisions of sections 1 and 5 of Article XIII of the Constitution
and the decision of the Supreme Court in the case of Krivenko v.
The Register of Deeds of Manila, 44 Off. Gaz., 1211, a deed of
donation of a parcel of land executed by a Filipino citizen in favor
of a religious organization whose founder, trustees and
administrator are non-Filipinos, can not be admitted for
registration.
3. ID.; ID.; ID.; ID.; REFUSAL OF REGISTER OF DEEDS TO
REGISTER DEED OF DONATION IS NOT VIOLATIVE OF
FREEDOM OF RELIGION CLAUSE. The refusal of the
Register of Deeds to register said deed of donation is not violative
of the freedom of religion clause of Constitution (section 1 [7],
Article III), since land tenure is by no means indispensable to the
free exercise and enjoyment of religious profession or worship; or
that one may not worship the Deity according to the dictates of his
own conscience unless upon land held in free simple.
REYES, J.B.L., J.:
The Register of Deeds for the province of Rizal refused to accept
for record a deed of donation executed in due form on January
22, 1953, by Jesus Dy, a Filipino citizen, conveying a parcel of
residential land, in Caloocan, Rizal, known as lot No. 2, block 48D, PSD-4212, G.L.R.O. Record No. 11267, in favor of the
unregistered religious organization "Ung Siu Si Temple", operating
through three trustees all of Chinese nationality. The donation
was duly accepted by Yu Juan, of Chinese nationality, founder
and deaconess of the Temple, acting in representation and in
behalf of the latter and its trustees.
The refusal of the Registrar was elevated en Consultato the IVth
Branch of the Court of First Instance of Manila. On March 14,
1953, the Court upheld the action of the Rizal Register of Deeds,
saying:
The question raised by the Register of Deeds in the
above transcribed consulta is whether a deed of
donation of a parcel of land executed in favor of a
religious organization whose founder, trustees and
administrator are Chinese citizens should be registered
or not.

SECTION 1. It shall be lawful for all religious

associations, of whatever sort or denomination, whether
incorporated in the Philippine Islands or in the name of
other country, or not incorporated at all, to hold land in
the Philippine Islands upon which to build churches,
parsonages, or educational or charitable institutions.
SEC. 2. Such religious institutions, if not incorporated,
shall hold the land in the name of three Trustees for the
use of such associations; . . .. (Printed Rec. App. p. 5.)
and (2) that the refusal of the Register of Deeds violates the
freedom of religion clause of our Constitution [Art. III, Sec. 1(7)].
We are of the opinion that the Court below has correctly held that
in view of the absolute terms of section 5, Title XIII, of the
Constitution, the provisions of Act No. 271 of the old Philippine
Commission must be deemed repealed since the Constitution
was enacted, in so far as incompatible therewith. In providing that,

Save in cases of hereditary succession, no private

agricultural land shall be transferred or assigned except
to individuals, corporations or associations qualified to
acquire or hold lands of the public domain in the
Philippines,
the Constitution makes no exception in favor of religious
associations. Neither is there any such saving found in sections 1
and 2 of Article XIII, restricting the acquisition of public agricultural
lands and other natural resources to "corporations or associations
at least sixty per centum of the capital of which is owned by such
citizens" (of the Philippines).
The fact that the appellant religious organization has no capital
stock does not suffice to escape the Constitutional inhibition,
since it is admitted that its members are of foreign nationality. The
purpose of the sixty per centum requirement is obviously to
ensure that corporations or associations allowed to acquire
agricultural land or to exploit natural resources shall be controlled
by Filipinos; and the spirit of the Constitution demands that in the
absence of capital stock, the controlling membership should be
composed of Filipino citizens.

It appearing from the record of the Consulta that UNG

SIU SI TEMPLE is a religious organization whose
deaconess, founder, trustees and administrator are all
Chinese citizens, this Court is of the opinion and so
hold that in view of the provisions of the sections 1 and
5 of Article XIII of the Constitution of the Philippines
limiting the acquisition of land in the Philippines to its
citizens, or to corporations or associations at least sixty
per centum of the capital stock of which is owned by
such citizens adopted after the enactment of said Act
No. 271, and the decision of the Supreme Court in the
case of Krivenko vs. the Register of Deeds of Manila,
the deed of donation in question should not be admitted
for admitted for registration. (Printed Rec. App. pp 1718).

To permit religious associations controlled by non-Filipinos to

acquire agricultural lands would be to drive the opening wedge to
revive alien religious land holdings in this country. We can not
ignore the historical fact that complaints against land holdings of
that kind were among the factors that sparked the revolution of
1896.

Not satisfied with the ruling of the Court of First Instance, counsel
for the donee Uy Siu Si Temple has appealed to this Court,
claiming: (1) that the acquisition of the land in question, for
religious purposes, is authorized and permitted by Act No. 271 of
the old Philippine Commission, providing as follows:

The resolution appealed from is affirmed, with costs against

appellant.

As to the complaint that the disqualification under article XIII is

violative of the freedom of religion guaranteed by Article III of the
Constitution, we are by no means convinced (nor has it been
shown) that land tenure is indispensable to the free exercise and
enjoyment of religious profession or worship; or that one may not
worship the Deity according to the dictates of his own conscience
unless upon land held in fee simple.

Pablo, Acting C.J., Bengzon, Montemayor, Reyes, A., Bautista

Angelo, Labrador, and Concepcion, JJ., concur.

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CORPORATION LAW | 68

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-6055

June 12, 1953

THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
WILLIAM H. QUASHA, defendant-appellant.
SYLLABUS

1. CONSTITUTIONAL LAW; CORPORATIONS; PUBLIC

UTILITIES; MERE FORMATION OF PUBLIC UTILITY
CORPORATION WITHOUT THE REQUISITE FILIPINO CAPITAL
NOT PROHIBITED. The Constitution does not prohibit the
mere formation of a public utility corporation without the required
proportion of Filipino capital. What it does prohibit is the granting
of a franchise or other form of authorization for the operation of a
public utility to a corporation already in existence but without the
requisite proportion of Filipino capital (sec. 8, Art. XIV of the
Constitution).
2. ID.; ID.; ID.; DUTY OF REVEALING THE OWNERSHIP OF
THE CAPITAL OF A CORPORATION. If the Constitution does
not prohibit the mere formation of a public utility corporation with
alien capital, then how could the accused be charged with having
wrongfully intended to circumvent that fundamental law by not
disclosing in the articles of incorporation that one of the

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CORPORATION LAW | 69

incorporators, a Filipino, was a mere trustee of his American coincorporators and that for that reason the subscribed capital stock
of the corporation was wholly American? For the mere formation
of the corporation such disclosure was not essential, and the
Corporation Law does not require it. The accused was, therefore,
under no obligation to make it. In the absence of such obligation
and of the alleged wrongful intent on the part of the accused, he
cannot legally be convicted of the crime of falsification for having
allegedly perverted the truth in a narration of facts.
3. FALSIFICATION; FALSE NARRATION FOR NOT REVEALING
A CERTAIN FACT, NOT PUNISHABLE IF THERE IS NO LEGAL
OBLIGATION TO DISCLOSE THE TRUTH. It is essential to
the commission of this crime that the perversion of truth in a
narration of facts must be made with the wrongful intent of injuring
a third person and even if such wrongful intent is proven, still the
untruthful statement will not constitute criminal falsification if there
is no legal obligation on the part of the narrator to disclose the
truth. (U. S. v. Reyes, 1 Phil., 341; U. S. v. Lopez, 15 Phil., 515.)
Wrongful intent to injure a third person and obligation on the part
of the narrator to disclose the truth are thus essential to a
conviction for the crime of falsification under articles 171(4) and
172(1) of the Revised Penal Code.

value of P59,000; and that Baylon and the American subscribers

had already paid 25 per cent of their respective subscriptions.
Ostensibly the owner of, or subscriber to, 60.005 per cent of the
subscribed capital stock of the corporation, Baylon nevertheless
did not have the controlling vote because of the difference in
voting power between the preferred shares and the common
shares. Still, with the capital structure as it was, the article of
incorporation were accepted for registration and a certificate of
incorporation was issued by the Securities and Exchange
Commission.
There is no question that Baylon actually subscribed to 60.005
per cent of the subscribed capital stock of the corporation. But it is
admitted that the money paid on his subscription did not belong to
him but to the Americans subscribers to the corporate stock. In
explanation, the accused testified, without contradiction, that in
the process of organization Baylon was made a trustee for the
American incorporators, and that the reason for making Baylon
such trustee was as follows:
Q. According to this article of incorporation Arsenio
Baylon subscribed to 1,135 preferred shares with a total
value of P1,135. Do you know how that came to be?

REYES, J.:
A. Yes.
William H. Quasha, a member of the Philippine bar, was charged
in the Court of First Instance of Manila with the crime of
falsification of a public and commercial document in that, having
been entrusted with the preparation and registration of the article
of incorporation of the Pacific Airways Corporation, a domestic
corporation organized for the purpose of engaging in business as
a common carrier, he caused it to appear in said article of
incorporation that one Arsenio Baylon, a Filipino citizen, had
subscribed to and was the owner of 60.005 per cent of the
subscribed capital stock of the corporation when in reality, as the
accused well knew, such was not the case, the truth being that
the owner of the portion of the capital stock subscribed to by
Baylon and the money paid thereon were American citizen whose
name did not appear in the article of incorporation, and that the
purpose for making this false statement was to circumvent the
constitutional mandate that no corporation shall be authorize to
operate as a public utility in the Philippines unless 60 per cent of
its capital stock is owned by Filipinos.
Found guilty after trial and sentenced to a term of imprisonment
and a fine, the accused has appealed to this Court.
The essential facts are not in dispute. On November 4,1946, the
Pacific Airways Corporation registered its articles of incorporation
with the Securities and Exchanged Commission. The article were
prepared and the registration was effected by the accused, who
was in fact the organizer of the corporation. The article stated that
the primary purpose of the corporation was to carry on the
business of a common carrier by air, land or water; that its capital
stock was P1,000,000, represented by 9,000 preferred and
100,000 common shares, each preferred share being of the par
value of p100 and entitled to 1/3 vote and each common share, of
the par value of P1 and entitled to one vote; that the amount
capital stock actually subscribed was P200,000, and the names of
the subscribers were Arsenio Baylon, Eruin E. Shannahan, Albert
W. Onstott, James O'Bannon, Denzel J. Cavin, and William H.
Quasha, the first being a Filipino and the other five all Americans;
that Baylon's subscription was for 1,145 preferred shares, of the
total value of P114,500, and for 6,500 common shares, of the total
par value of P6,500, while the aggregate subscriptions of the
American subscribers were for 200 preferred shares, of the total
par value of P20,000, and 59,000 common shares, of the total par

The people who were desirous of forming the corporation, whose

names are listed on page 7 of this certified copy came to my
house, Messrs. Shannahan, Onstott, O'Bannon, Caven, Perry
and Anastasakas one evening. There was considerable difficulty
to get them all together at one time because they were pilots.
They had difficulty in deciding what their respective share
holdings would be. Onstott had invested a certain amount of
money in airplane surplus property and they had obtained a
considerable amount of money on those planes and as I recall
they were desirous of getting a corporation formed right away.
And they wanted to have their respective shares holdings
resolved at a latter date. They stated that they could get together
that they feel that they had no time to settle their respective share
holdings. We discussed the matter and finally it was decided that
the best way to handle the things was not to put the shares in the
name of anyone of the interested parties and to have someone
act as trustee for their respective shares holdings. So we looked
around for a trustee. And he said "There are a lot of people whom
I trust." He said, "Is there someone around whom we could get
right away?" I said, "There is Arsenio. He was my boy during the
liberation and he cared for me when i was sick and i said i
consider him my friend." I said. They all knew Arsenio. He is a
very kind man and that was what was done. That is how it came
about.
Defendant is accused under article 172 paragraph 1, in
connection with article 171, paragraph 4, of the Revised Penal
Code, which read:
ART. 171. Falsification by public officer, employee, or
notary or ecclesiastic minister. The penalty of prision
mayor and a fine not to exceed 5,000 pesos shall be
imposed upon any public officer, employee, or notary
who, taking advantage of his official position, shall
falsify a document by committing any of the following
acts:
xxx

xxx

xxx

4. Making untruthful statements in a narration of facts.

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CORPORATION LAW | 70

ART. 172. Falsification by private individuals and use of

falsified documents. The penalty of prision
correccional in its medium and maximum period and a
fine of not more than 5,000 pesos shall be imposed
upon:
xxx

xxx

xxx

1. Any private individual who shall commit any of the

falsifications enumerated in the next preceding article in
any public or official document or letter of exchange or
any other kind of commercial document.
Commenting on the above provision, Justice Albert, in his wellknown work on the Revised Penal Code ( new edition, pp. 407408), observes, on the authority of U.S. vs. Reyes, (1 Phil., 341),
that the perversion of truth in the narration of facts must be made
with the wrongful intent of injuring a third person; and on the
authority of U.S. vs. Lopez (15 Phil., 515), the same author further
maintains that even if such wrongful intent is proven, still the
untruthful statement will not constitute the crime of falsification if
there is no legal obligation on the part of the narrator to disclose
the truth. Wrongful intent to injure a third person and obligation on
the part of the narrator to disclose the truth are thus essential to a
conviction for a crime of falsification under the above article of the
Revised Penal Code.
Now, as we see it, the falsification imputed in the accused in the
present case consists in not disclosing in the articles of
incorporation that Baylon was a mere trustee ( or dummy as the
prosecution chooses to call him) of his American co-incorporators,
thus giving the impression that Baylon was the owner of the
shares subscribed to by him which, as above stated, amount to
60.005 per cent of the sub-scribed capital stock. This, in the
opinion of the trial court, is a malicious perversion of the truth
made with the wrongful intent circumventing section 8, Article XIV
of the Constitution, which provides that " 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
corporation or other entities organized under the law of the
Philippines, sixty per centum of the capital of which is owned by
citizens of the Philippines . . . ." Plausible though it may appear at
first glance, this opinion loses validity once it is noted that it is
predicated on the erroneous assumption that the constitutional
provision just quoted was meant to prohibit the mere formation of
a public utility corporation without 60 per cent of its capital being
owned by the Filipinos, a mistaken belief which has induced the
lower court to that the accused was under obligation to disclose
the whole truth about the nationality of the subscribed capital
stock of the corporation by revealing that Baylon was a mere
trustee or dummy of his American co-incorporators, and that in
not making such disclosure defendant's intention was to
circumvent the Constitution to the detriment of the public
interests. Contrary to the lower court's assumption, the
Constitution does not prohibit the mere formation of a public utility
corporation without the required formation of Filipino capital. What
it does prohibit is the granting of a franchise or other form of
authorization for the operation of a public utility to a corporation
already in existence but without the requisite proportion of Filipino
capital. This is obvious from the context, for the constitutional
provision in question qualifies the terms " franchise", "certificate",
or "any other form of authorization" with the phrase "for the
operation of a public utility," thereby making it clear that the
franchise meant is not the "primary franchise" that invest a body
of men with corporate existence but the "secondary franchise" or
the privilege to operate as a public utility after the corporation has
already come into being.

If the Constitution does not prohibit the mere formation of a public

utility corporation with the alien capital, then how can the accused
be charged with having wrongfully intended to circumvent that
fundamental law by not revealing in the articles of incorporation
that Baylon was a mere trustee of his American co-incorporation
and that for that reason the subscribed capital stock of the
corporation was wholly American? For the mere formation of the
corporation such revelation was not essential, and the
Corporation Law does not require it. Defendant was, therefore,
under no obligation to make it. In the absence of such obligation
and of the allege wrongful intent, defendant cannot be legally
convicted of the crime with which he is charged.
It is urged, however, that the formation of the corporation with 60
per cent of its subscribed capital stock appearing in the name of
Baylon was an indispensable preparatory step to the subversion
of the constitutional prohibition and the laws implementing the
policy expressed therein. This view is not correct. For a
corporation to be entitled to operate a public utility it is not
necessary that it be organized with 60 per cent of its capital
owned by Filipinos from the start. A corporation formed with
capital that is entirely alien may subsequently change the
nationality of its capital through transfer of shares to Filipino
citizens. conversely, a corporation originally formed with Filipino
capital may subsequently change the national status of said
capital through transfer of shares to foreigners. What need is
there then for a corporation that intends to operate a public utility
to have, at the time of its formation, 60 per cent of its capital
owned by Filipinos alone? That condition may anytime be attained
thru the necessary transfer of stocks. The moment for determining
whether a corporation is entitled to operate as a public utility is
when it applies for a franchise, certificate, or any other form of
authorization for that purpose. And that can be done after the
corporation has already come into being and not while it is still
being formed. And at that moment, the corporation must show
that it has complied not only with the requirement of the
Constitution as to the nationality of its capital, but also with the
requirements of the Civil Aviation Law if it is a common carrier by
air, the Revised Administrative Code if it is a common carrier by
water, and the Public Service Law if it is a common carrier by land
or other kind of public service.
Equally untenable is the suggestion that defendant should at least
be held guilty of an "impossible crime" under article 59 of the
Revised Penal Code. It not being possible to suppose that
defendant had intended to commit a crime for the simple reason
that the alleged constitutional prohibition which he is charged for
having tried to circumvent does not exist, conviction under that
article is out of the question.
The foregoing consideration can not but lead to the conclusion
that the defendant can not be held guilty of the crime charged.
The majority of the court, however, are also of the opinion that,
even supposing that the act imputed to the defendant constituted
falsification at the time it was perpetrated, still with the approval of
the Party Amendment to the Constitution in March, 1947, which
placed Americans on the same footing as Filipino citizens with
respect to the right to operate public utilities in the Philippines,
thus doing away with the prohibition in section 8, Article XIV of the
Constitution in so far as American citizens are concerned, the said
act has ceased to be an offense within the meaning of the law, so
that defendant can no longer be held criminally liable therefor.
In view of the foregoing, the judgment appealed from is reversed
and the defendant William H. Quasha acquitted, with costs de
oficio.

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CORPORATION LAW | 71

Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Jugo, Bautista

Angelo, and Labrador, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-19891

July 31, 1964

J.R.S. BUSINESS CORPORATION, J.R. DA SILVA and A.J.

BELTRAN, petitioners,
vs.
IMPERIAL INSURANCE, INC., MACARIO M. OFILADA, Sheriff
of Manila and
HON. AGUSTIN MONTESA, Judge of the Court of First
Instance of Manila, respondents.
SYLLABUS

1.
CORPORATION
LAW;
SECONDARY
FRANCHISE;
MESSENGER SERVICE. The right to operate a messenger
and delivery service by virtue of a legislative enactment is a
secondary franchise.
2. ID.; ID.; SUBJECT TO EXECUTION SALE. A secondary
franchise is subject to levy and sale on execution together with all
the property necessary for the enjoyment thereof.
3. ID.; ID.; ID.; PROCEDURE. A secondary franchise and the
property necessary for its enjoyment can be sold under execution
only when such sale is especially decreed and ordered in the
judgment and it becomes effective only when such sale is
confirmed by the Court after due notice.
4. ID.; ID.; ID.; ID.; EFFECT OF ABSENCE OF SPECIAL

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CORPORATION LAW | 72

DECREE. Where the judgment does not contain any special

decree making the franchise of a private corporation answerable
for its judgment debt, the inclusion of said corporations franchise,
trade name and capital stocks in the execution sale of its
properties has no jurisdiction and such sale should be set aside in
as far as it authorizes such levy and sale.
PAREDES, J.:
Petitioner J. R. Da Silva, is the President of the J.R.S. Business
Corporation, an establishment duly franchised by the Congress of
the Philippines, to conduct a messenger and delivery express
service. On July 12, 1961, the respondent Imperial Insurance,
Inc., presented with the CFI of Manila a complaint (Civ. Case No.
47520), for sum of money against the petitioner corporation. After
the defendants therein have submitted their Answer, the parties
entered into a Compromise Agreement, assisted by their
respective counsels, the pertinent portions of which recite:
1) WHEREAS, the DEFENDANTS admit and confess
their joint and solidary indebtedness to the PLAINTIFF
in the full sum of PESOS SIXTY ONE THOUSAND
ONE
HUNDRED
SEVENTY-TWO
&
32/100
(P61,172.32), Philippine Currency, itemized as follows:
a) Principal

P50,000.00

b) Interest at 12% per annum

5,706.14

c) Liquidated damages at 7%
3,330.58
per annum
d) Costs of suit

135.60

e) Attorney's fees

2,000.00

2) WHEREAS, the DEFENDANTS bind themselves,

jointly and severally, and hereby promise to pay their
aforementioned obligation to the PLAINTIFF at its
business address at 301-305 Banquero St., (Ground
Floor), Regina Building, Escolta, Manila, within sixty
(60) days from March 16, 1962 or on or before May 14,
1962;
3) WHEREAS, in the event the DEFENDANTS FAIL to
pay in full the total amount of PESOS SIXTY ONE
THOUSAND ONE HUNDRED SEVENTY TWO &
32/100 (P61,172.32), Philippine Currency, for any
reason whatsoever, on May 14, 1962, the PLAINTIFF
shall be entitled, as a matter of right, to move for the
execution of the decision to be rendered in the aboveentitled case by this Honorable Court based on this
COMPROMISE AGREEMENT.
On March 17, 1962, the lower court rendered judgment
embodying the contents of the said compromise agreement, the
dispositive portion of which reads
WHEREFORE, the Court hereby approves the abovequoted compromise agreement and renders judgment
in accordance therewith, enjoining the parties to comply
faithfully and strictly with the terms and conditions
thereof, without special pronouncement as to costs.

Wherefore, the parties respectfully pray that the

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

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CORPORATION LAW | 73

The respondent Court's act of postponing the scheduled sale was

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

2 Fletcher's Cyclopedia Corp. Secs. 1153, 1158; 3

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

VOLENTI NON FIT INJURIA

CORPORATION LAW | 74

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-2294

May 25, 1951

FILIPINAS COMPAIA DE SEGUROS, petitioner,

vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
SYLLABUS
1.
CORPORATIONS;
NATIONALITY
OF
PRIVATE
CORPORATION; CONTROL TEST. The nationality of a private
corporation is determined by the character or citizenship of its
controlling stockholders.
2. ID.; ID.; ID.; INTERNATIONAL LAW; EFFECT OF WAR.
Where majority of the stockholders of a corporation were German
subjects, the corporation became an enemy corporation upon the
outbreak of the war between the United States and Germany.
3. INSURANCE; TERMINATION OF POLICY OF PUBLIC
ENEMY. As the Philippine Insurance Law (Act No. 2427, as
amended), in its section 8, provides that "anyone except a public
enemy may be insured," an insurance policy ceases to be
allowable as soon as an insured becomes a public enemy.
4. ID.; ID.; RETURN OF PREMIUMS UPON TERMINATION OF
POLICY BY REASON OF WAR. Where an insurance policy
ceases to be effective by reason of war, which has made the
insured an enemy, the premiums paid for the period covered by
the policy from the date war is declared, should be returned.
PARAS, C.J.:

VOLENTI NON FIT INJURIA

CORPORATION LAW | 75

On October 1, 1941, the respondent corporation, Christern

Huenefeld, & Co., Inc., after payment of corresponding premium,
obtained from the petitioner ,Filipinas Cia. de Seguros, fire policy
No. 29333 in the sum of P1000,000, covering merchandise
contained in a building located at No. 711 Roman Street, Binondo
Manila. On February 27, 1942, or during the Japanese military
occupation, the building and insured merchandise were burned. In
due time the respondent submitted to the petitioner its claim
under the policy. The salvage goods were sold at public auction
and, after deducting their value, the total loss suffered by the
respondent was fixed at P92,650. The petitioner refused to pay
the claim on the ground that the policy in favor of the respondent
had ceased to be in force on the date the United States declared
war against Germany, the respondent Corporation (though
organized under and by virtue of the laws of the Philippines) being
controlled by the German subjects and the petitioner being a
company under American jurisdiction when said policy was issued
on October 1, 1941. The petitioner, however, in pursuance of the
order of the Director of Bureau of Financing, Philippine Executive
Commission, dated April 9, 1943, paid to the respondent the sum
of P92,650 on April 19, 1943.
The present action was filed on August 6, 1946, in the Court of
First Instance of Manila for the purpose of recovering from the
respondent the sum of P92,650 above mentioned. The theory of
the petitioner is that the insured merchandise were burned up
after the policy issued in 1941 in favor of the respondent
corporation has ceased to be effective because of the outbreak of
the war between the United States and Germany on December
10, 1941, and that the payment made by the petitioner to the
respondent corporation during the Japanese military occupation
was under pressure. After trial, the Court of First Instance of
Manila dismissed the action without pronouncement as to costs.
Upon appeal to the Court of Appeals, the judgment of the Court of
First Instance of Manila was affirmed, with costs. The case is now
before us on appeal by certiorari from the decision of the Court of
Appeals.
The Court of Appeals overruled the contention of the petitioner
that the respondent corporation became an enemy when the
United States declared war against Germany, relying on English
and American cases which held that a corporation is a citizen of
the country or state by and under the laws of which it was created
or organized. It rejected the theory that nationality of private
corporation is determine by the character or citizenship of its
controlling stockholders.
There is no question that majority of the stockholders of the
respondent corporation were German subjects. This being so, we
have to rule that said respondent became an enemy corporation
upon the outbreak of the war between the United States and
Germany. The English and American cases relied upon by the
Court of Appeals have lost their force in view of the latest decision
of the Supreme Court of the United States in Clark vs. Uebersee
Finanz Korporation, decided on December 8, 1947, 92 Law. Ed.
Advance Opinions, No. 4, pp. 148-153, in which the controls test
has been adopted. In "Enemy Corporation" by Martin Domke, a
paper presented to the Second International Conference of the
Legal Profession held at the Hague (Netherlands) in August. 1948
the following enlightening passages appear:
Since World War I, the determination of enemy
nationality of corporations has been discussion in many
countries, belligerent and neutral. A corporation was
subject to enemy legislation when it was controlled by
enemies, namely managed under the influence of
individuals or corporations, themselves considered as
enemies. It was the English courts which first the

Daimler case applied this new concept of "piercing the

corporate veil," which was adopted by the peace of
Treaties of 1919 and the Mixed Arbitral established
after the First World War.
The United States of America did not adopt the control
test during the First World War. Courts refused to
recognized the concept whereby American-registered
corporations could be considered as enemies and thus
subject to domestic legislation and administrative
measures regarding enemy property.
World War II revived the problem again. It was known
that German and other enemy interests were cloaked
by domestic corporation structure. It was not only by
legal ownership of shares that a material influence
could be exercised on the management of the
corporation but also by long term loans and other
factual situations. For that reason, legislation on enemy
property enacted in various countries during World War
II adopted by statutory provisions to the control test and
determined, to various degrees, the incidents of control.
Court decisions were rendered on the basis of such
newly enacted statutory provisions in determining
enemy character of domestic corporation.
The United States did not, in the amendments of the
Trading with the Enemy Act during the last war, include
as did other legislations the applications of the control
test and again, as in World War I, courts refused to
apply this concept whereby the enemy character of an
American
or
neutral-registered
corporation
is
determined by the enemy nationality of the controlling
stockholders.
Measures of blocking foreign funds, the so called
freezing regulations, and other administrative practice
in the treatment of foreign-owned property in the United
States allowed to large degree the determination of
enemy interest in domestic corporations and thus the
application of the control test. Court decisions
sanctioned such administrative practice enacted under
the First War Powers Act of 1941, and more recently, on
December 8, 1947, the Supreme Court of the United
States definitely approved of the control theory. In Clark
vs. Uebersee Finanz Korporation, A. G., dealing with a
Swiss corporation allegedly controlled by German
interest, the Court: "The property of all foreign interest
was placed within the reach of the vesting power (of the
Alien Property Custodian) not to appropriate friendly or
neutral assets but to reach enemy interest which
masqueraded under those innocent fronts. . . . The
power of seizure and vesting was extended to all
property of any foreign country or national so that no
innocent appearing device could become a Trojan
horse."
It becomes unnecessary, therefore, to dwell at length on the
authorities cited in support of the appealed decision. However, we
may add that, in Haw Pia vs. China Banking Corporation, * 45 Off
Gaz., (Supp. 9) 299, we already held that China Banking
Corporation came within the meaning of the word "enemy" as
used in the Trading with the Enemy Acts of civilized countries not
only because it was incorporated under the laws of an enemy
country but because it was controlled by enemies.

VOLENTI NON FIT INJURIA

CORPORATION LAW | 76

The Philippine Insurance Law (Act No. 2427, as amended,) in

section 8, provides that "anyone except a public enemy may be
insured." It stands to reason that an insurance policy ceases to be
allowable as soon as an insured becomes a public enemy.
Effect of war, generally. All intercourse between
citizens of belligerent powers which is inconsistent with
a state of war is prohibited by the law of nations. Such
prohibition includes all negotiations, commerce, or
trading with the enemy; all acts which will increase, or
tend to increase, its income or resources; all acts of
voluntary submission to it; or receiving its protection;
also all acts concerning the transmission of money or
goods; and all contracts relating thereto are thereby
nullified. It further prohibits insurance upon trade with or
by the enemy, upon the life or lives of aliens engaged in
service with the enemy; this for the reason that the
subjects of one country cannot be permitted to lend
their assistance to protect by insurance the commerce
or property of belligerent, alien subjects, or to do
anything detrimental too their country's interest. The
purpose of war is to cripple the power and exhaust the
resources of the enemy, and it is inconsistent that one
country should destroy its enemy's property and repay
in insurance the value of what has been so destroyed,
or that it should in such manner increase the resources
of the enemy, or render it aid, and the commencement
of war determines, for like reasons, all trading
intercourse with the enemy, which prior thereto may
have been lawful. All individuals therefore, who
compose the belligerent powers, exist, as to each other,
in a state of utter exclusion, and are public enemies. (6
Couch, Cyc. of Ins. Law, pp. 5352-5353.)

the Bureau of Financing, in ordering the petitioner to pay the claim

of the respondent, merely obeyed the instruction of the Japanese
Military Administration, as may be seen from the following: "In
view of the findings and conclusion of this office contained in its
decision on Administrative Case dated February 9, 1943 copy of
which was sent to your office and the concurrence therein of the
Financial Department of the Japanese Military Administration, and
following the instruction of said authority, you are hereby ordered
to pay the claim of Messrs. Christern, Huenefeld & Co., Inc. The
payment of said claim, however, should be made by means of
crossed check." (Emphasis supplied.)
It results that the petitioner is entitled to recover what paid to the
respondent under the circumstances on this case. However, the
petitioner will be entitled to recover only the equivalent, in actual
Philippines currency of P92,650 paid on April 19, 1943, in
accordance with the rate fixed in the Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and the
respondent corporation is ordered to pay to the petitioner the sum
of P77,208.33, Philippine currency, less the amount of the
premium, in Philippine currency, that should be returned by the
petitioner for the unexpired term of the policy in question,
beginning December 11, 1941. Without costs. So ordered.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-3869

In the case of an ordinary fire policy, which grants

insurance only from year, or for some other specified
term it is plain that when the parties become alien
enemies, the contractual tie is broken and the
contractual rights of the parties, so far as not vested.
lost. (Vance, the Law on Insurance, Sec. 44, p. 112.)
The respondent having become an enemy corporation on
December 10, 1941, the insurance policy issued in its favor on
October 1, 1941, by the petitioner (a Philippine corporation) had
ceased to be valid and enforcible, and since the insured goods
were burned after December 10, 1941, and during the war, the
respondent was not entitled to any indemnity under said policy
from the petitioner. However, elementary rules of justice (in the
absence of specific provision in the Insurance Law) require that
the premium paid by the respondent for the period covered by its
policy from December 11, 1941, should be returned by the
petitioner.
The Court of Appeals, in deciding the case, stated that the main
issue hinges on the question of whether the policy in question
became null and void upon the declaration of war between the
United States and Germany on December 10, 1941, and its
judgment in favor of the respondent corporation was predicated
on its conclusion that the policy did not cease to be in force. The
Court of Appeals necessarily assumed that, even if the payment
by the petitioner to the respondent was involuntary, its action is
not tenable in view of the ruling on the validity of the policy. As a
matter of fact, the Court of Appeals held that "any intimidation
resorted to by the appellee was not unjust but the exercise of its
lawful right to claim for and received the payment of the insurance
policy," and that the ruling of the Bureau of Financing to the effect
that "the appellee was entitled to payment from the appellant was,
well founded." Factually, there can be no doubt that the Director of

January 31, 1952

S. DAVIS WINSHIP, plaintiff-appellant,

vs.
PHILIPPINE TRUST COMPANY, defendant-appellee.
SYLLABUS
1. OBLIGATIONS AND CONTRACTS; BANK DEPOSITS;
TRANSFER
BY
ORDER
OF
JAPANESE
MILITARY
ADMINISTRATION; RELEASE OF BANK. As the defendant
Philippine Trust Company transferred and paid the credit
balances of the current account deposits of the Eastern Isles
Import Corporation and of the Eastern Isles, Inc. to the Bank of
Taiwan by order of the Japanese Military Administration, said
defendant was released from any obligation to the depositors or
their transferee.
2. CORPORATIONS; NATIONALITY, HOW DETERMINED.
The nationality of a private corporation is determined by the
character and citizenship of its controlling stockholders.
PARAS, J.:
Prior to December, 1941, the Eastern Isles Import corporation
organized under and existing by virtue of the laws of the
Philippines, all of the capital stock of which was and has been
owned by American citizens, except one share with a par value of
P100 in the name of Antonia Sevilla and one share with a par
value of P100 in the name of Edmund A. Schwesinger, had a
current account deposit with the Philippine Trust Company, and
as of December 29, 1941, the balance in favor of said depositor
was P51,410.91. Prior to December, 1941, the Eastern Isles, Inc.,
a corporation organized under and existing by virtue of the laws of

VOLENTI NON FIT INJURIA

CORPORATION LAW | 77

the Philippines, all of the capital stock of which was and has been
owned by American citizens, except one share with a par value of
P100 in the name of F. Capistrano, had a current account deposit
with the Philippine Trust Company, and as of December 29, 1941,
the balance in favor of said depositor was P34,827.74. The
Eastern Isles, Incorporated made a withdrawal of P204.37 which
was debited to said account on June 10, 1942.
On October 4, 1943, the Japanese Military Administration in the
Philippines issued an order requiring all deposit accounts of the
hostile people (including corporations) to be transferred to the
Bank of Taiwan, as the depository of the Japanese Military
Administration, which order the Philippine Trust Company was
specifically directed to comply with. On September 29, 1944, in
compliance with said order, the Philippine Trust Company
transferred and paid the credit balances of the current account
deposits of the Eastern Isles Import Corporation and of the
Eastern Isles, Inc. to the Bank of Taiwan.

its controlling stockholders; and this pronouncement is of course

decisive as to the hostile character of the Eastern Isles, Inc., as
far as the Japanese Military Administration was concerned, it
being conceded that the controlling stockholders of said
corporations were American citizens.
Wherefore, the appealed judgment is affirmed, with costs against
the appellant. So ordered.
Pablo, Bengzon, Montemayor, Reyes, Jugo and Bautista Angelo,
JJ., concur.

The pre-war current deposit accounts of the Eastern Isles Import

Corporation and of the Eastern Isles, Inc. were subsequently
transferred to S. Davis Winship who, on August 12, 1947,
presented to the Philippine Trust Company checks Nos. A-79212
and H-579401 covering the aforesaid deposits. The Philippine
Trust Company, however, refused to pay said checks, whereupon,
on September 6, 1947, S. Davis Winship instituted the present
action against the Philippine Trust Company in the Court of First
Instance of Manila, to recover upon the first cause of action the
sum of P51,410.91 and under the second cause of action the sum
of P34,827.74.
In its answer, the defendant Philippine trust Company invoked the
order of the Japanese Military Administration by virtue of which it
transferred the current deposit accounts in question to the Bank of
Taiwan as the depository of the Bureau of Enemy Property
Custody of the Japanese Military Administration. After trial, the
Court of First Instance of Manila rendered a decision upholding
the contention of the defendant and accordingly dismissing the
complaint. From this decision plaintiff appealed. In the case of
Everett Steamship Corporation vs. Bank of the Philippine Islands,
84 Phil., 202; 47 O.G., No. 1 p. 165, we made the following
pronouncement: This Court having ruled in the Haw Pia case that
the collection by the Bank of Taiwan of the China Banking
Corporation's credit from the latter's debtor, by order of the
Japanese Military Administration, was not a confiscation but a
mere sequestration of enemy's private personal property, and
therefore the payment by the plaintiff to the Bank of Taiwan was
valid and released his obligation to the defendant bank, it follows
that the Bank of Taiwan of plaintiff's deposit, and by order of the
Japanese Military Administration, was valid and released the
defendant's obligation to the plaintiff.'
In view of this pronouncement, we have to affirm the appealed
judgment. As it has been stipulated by the parties that the
defendant transferred the deposits in question to the Bank of
Taiwan in compliance with the order of the Japanese Military
Administration, the defendant was released from any obligation to
the depositors or their transferee. Appellant's contention that there
is no positive showing that the transfer was made by the
Philippine Trust Company in compliance with the order of the
Japanese Military Administration, and its logical effect is to make
such act binding on said company. At any rate, the defendant
corporation has not impugned its validity.
In the case of Filipinas Compaia de Seguros vs. Christern
Henefeld and Co., Inc., Phil., 54, we held that the nationality of a
private corporation is determined by the character or citizenship of

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-554

April 9, 1948

HAW PIA, plaintiff-appellant,

vs.
THE CHINA BANKING CORPORATION, defendant-appellee.

SYLLABUS
1. INTERNATIONAL LAW; LAND WARFARE; THE HAGUE
REGULATIONS; UNFORESEEN CASES. The provisions of
the Hague Regulations, section III, on Military Authority over
Hostile Territory, which is a part of the Hague Convention
respecting the laws and customs of war on land, are intended to
serve as a general rule of conduct for the belligerents in their
relations with each other and with the inhabitants, but as it had
not been found possible then to concert regulations covering all
the circumstances which occur in practice, and on the other hand
it could not have been intended by the High Contracting Parties
that the unforeseen cases should, in the absence of a written
undertaking, be left to the arbitrary judgment of military
commanders, it was agreed that "Until a complete code of the
laws of war has been issued, the High Contracting Parties deem it
expedient to declare that in cases not included in the Regulations
adopted by them, the inhabitants and the belligerents remain
under the protection and the rule of the principles of international
law, as they result for the usages established among civilized
peoples, from the laws of humanity, and the dictates of public
conscience."cralaw
virtua1aw
library
2. ID.; ID.; ID.; ID.; RIGHTS OF BELLIGERENT OCCUPANT
OVER ENEMY PUBLIC OR PRIVATE PROPERTY. Before the
Hague Convention, it was the usage or practice to allow or permit
the confiscation or appropriation by the belligerent occupant not
only of public but also of private property of the enemy in a

VOLENTI NON FIT INJURIA

CORPORATION LAW | 78

territory occupied by the belligerent hostile army; and as such

usage or practice was allowed, a fortiori, any other act short of
confiscation was necessarily permitted. Section III of the Hague
Regulations only prohibits the confiscation of private property by
order of the military authorities (art. 46), and pillage or stealing
and thievery thereof by individuals (art. 47); and as regards public
property, article 53 provides that cash funds, and property liable to
requisition and all other movable property belonging to the State
susceptible of military use or operation, may be confiscated or
taken possession of as a booty and utilized for the benefit of the
invaders government (II Oppenheim, 8th ed., sec., 137; 320 &
321, War Department; Basic Field Manual, Rules of Land Warfare
FM 27-10). The belligerents in their effort to control enemy
property within their jurisdiction or in territories occupied by their
armed forces in order to avoid their use in aid of the enemy and to
increase their own resources, after the Hague Convention and
specially during the first World War, had to resort to such
measures of prevention which do not amount to a straight
confiscation, as freezing, blocking, placing under custody and
sequestrating the enemy private property. Such acts are
recognized as not repugnant to the provisions of article 46 or any
other article of the Hague Regulations by well-known writers on
International Law, and are authorized not only in the Army and
Navy Manual of Military Government and Civil Affairs not only of
the United States, but also in similar manuals of Army and Navy
of other civilized countries, as well as in the Trading with the
Enemy Acts of said countries.
3. ID.; ID.; ID.; ID.; ID.; SEQUESTRATION, PURPOSE OF.
The purpose of sequestration is well expounded in the Annual
Report of the Office of the Alien Custodian for a period from
March 11, 1943, to June 30, 1943. "In the absence of effective
measures of control, enemy-owned property can be used to
further the interest of the enemy and to impede our own war
effort. All enemy-controlled assets can be used to finance
propaganda, espionage, and sabotage in this country or in
countries friendly to our cause. They can be used to acquire
stocks of strategic materials and supplies . . . use to the enemy,
they will be diverted from our own war effort," and the national
safety requires the prohibition of all unlicensed communication,
direct or indirect, with enemy and enemy-occupied territories. To
the extent that this prohibition is effective, the residents of such
territory are prevented from exercising the rights and
responsibilities of ownership over property located in the United
States. Meanwhile, decisions affecting the utilization of such
property must be made and carried out. Houses must be
maintained and rents collected; payments of principal and interest
on mortgages must be made for the account of foreign debtors
and foreign creditors; stranded stocks of material and equipment
must be sold; patents must be licensed, business enterprises
must be operated or liquidated, and foreign interest must be
represented in court actions. The number of decisions to be made
in connection with property is in fact multiplied by a state of war,
which requires that productive resources be shifted from one use
to another so as to conform with the requirements of a war
economy."cralaw
virtua1aw
library
4. ID.; ID.; ID.; ID.; ID.; ID.; "ENEMY," MEANING OF; CASE AT
BAR. The defendant-appellee, China Banking Corporation,
comes within the meaning of the word "enemy" as used in the
Trading with the Enemy Acts of civilized countries, because not
only it was controlled by Japans enemies, but it was, besides,
incorporated under the laws of a country with which Japan was at
war.
5. ID.; ID.; ID.; ID.; ID.; ID.; TRADING WITH THE ENEMY ACT
OF UNITED STATES AND OTHER COUNTRIES APPLICABLE
IN OCCUPIED HOSTILE TERRITORY. The Trading with the
Enemy Act of the United States, like that of the United Kingdom or
Great Britain, and those of other countries, may be applied and

enforced in a hostile territory occupied by the United States

armed forces, because section 2 of said Act provides "That the
words United States. as used herein, shall be deemed to mean
all land and water, continental or insular, in any way within the
jurisdiction of the United States or occupied by the military or
naval forces thereof." After the liberation of the Philippines during
World War II, properties belonging to Japanese nationals located
in this country were taken possession of by the Alien Property
Custodian appointed by the President of the United States under
the Trading with the Enemy Act, because, although the
Philippines was not a territory or within the Jurisdiction or national
domain of the United States, it was then occupied by the military
and naval forces thereof.
6. ID.; ID.; ID.; ID.; ID.; ID.; ID.; DIFFERENCE BETWEEN
OBLIGATIONS OF UNITED STATES ARISING FROM
APPLICATION OF TRADING WITH THE ENEMY ACT WITHIN
NATIONAL DOMAIN AND WITHIN OCCUPIED HOSTILE
TERRITORY. The obligations assumed by the United States, in
applying the Trading with the Enemy Act of the United States to
properties within her national domain, is different and distinct from
those arising from the application thereof to enemy properties
located within the hostile territory occupied by her armed forces.
In the first case, Congress is untramelled and free to authorize the
seizure, use, or appropriation of such properties without any
compensation to the owners, for although section 2 of the Trading
with the Enemy Act provides that "at the end of the war any claim
of any enemy or of an ally of enemy to any money or other
property received and held by the alien property custodian or
deposited in the United States Treasury shall be settled by
Congress," the owners of the properties seized within the national
domain of the United States are not entitled to demand its release
or compensation for its seizure, but what would ultimately come
back to them, might be secured, not as a matter of right, but as a
matter either of grace to the vanquished or exacted by the victor,
for the case is to be governed by the domestic laws of the United
States, and not by the Hague Regulations or International Law (U.
S. v. Chemical Foundation, Inc., 272 U. S., 1; United States v. S.
S. White Dental Manufacturing Company, 274 U. S. 402). While in
the latter case, when properties are sequestered in a hostile
occupied territory by the armed forces of the United States,
Congress can not legally refuse to credit the compensation for
them to the States of the owners as payment on account of the
sums payable by said States under treaties, and the owners have
to look for compensation to their States, otherwise, they would
violate article 46 of the Hague Regulations or their pledge of good
faith implied in the act of sequestrating or taking control of such
properties.
7. ID.; ID.; ID.; ID.; ID.; ID.; ID.; JAPAN, RIGHT OF, TO
SEQUESTRATE AND LIQUIDATE ENEMY BANKS; CASE AT
BAR. It is to be presumed that Japan, in sequestrating and
liquidating the China Banking Corporation, must have acted in
accordance, either with her own Manual of the Army and Navy
and Civil Affairs, or with her Trading with the Enemy Act, and even
if not, it being permitted to the Allied Nations, specially the United
States and England, to sequestrate, impound, and block enemy
properties found within their own domain or in enemy territories
occupied during the war by their armed forces, and it being not
contrary to the Hague Regulations or international law, Japan had
also the right to do the same in the Philippines by virtue of the
international law principle that "what is permitted to one
belligerent is also allowed to the other."cralaw virtua1aw library
8. ID.; ID.; ID.; ID.; ID.; ID.; ID.; ID.; LIQUIDATION BY JAPANESE
MILITARY ADMINISTRATION OF ENEMY BANKS NOT A
CONFISCATION; CASE AT BAR. Taking into consideration the
acts of the Japanese Military Administration in treating the private
properties of the so-called enemy banks, it appears evident that
Japan did not intend to confiscate or appropriate the assets of

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said banks or the debts due them from their debtors, and thus
violate article 46 or any other article of the Hague Regulations. It
is true that, as to private personal properties of the enemy,
freezing, blocking or impounding thereof is sufficient for the
purpose of preventing their being used in aid of the enemy; but
with regard to the funds of commercial banks like the so-called
enemy banks, it was impossible or impracticable to attain the
purpose for which the freezing, blocking and impounding are
intended, without liquidating the said banks and collecting the
loans given by them to hundreds if not thousands of persons
scattered over the Islands. Without doing so, their assets or
money loaned to so many persons can not properly be
impounded or blocked, in order to prevent their being used in aid
to the enemy though the intervention of their very debtors, and
successfully wage economic as well as military war. That the
liquidation or winding up of the business of the China Banking
Corporation and other enemy banks did not constitute a
confiscation or appropriation of their properties or of the debts due
them from their debtors, but a mere sequestration of their assets
during the duration of the war for the purposes already stated, is
evidenced conclusively by the facts enumerated in the opinion.
9. ID.; ID.; ID.; ID.; ID.; ID.; ID.; OWNERS OF PROPERTIES
SEQUESTRATED, HOW INDEMNIFIED. The fact that
Japanese Military authorities failed to pay the enemy banks the
balance of the money collected by the Bank of Taiwan from the
debtors of said banks, did not and could not change the
sequestration or impounding by them of the banks asset during
the war, into an outright confiscation or appropriation thereof.
Aside from the fact that it was physically impossible for the
Japanese Military authorities to do so because they were forcibly
driven out of the Philippines or annihilated by the forces of
liberation, following the readjustment of rights of private property
on land seized by the enemy provided by the Treaty of Versailles
and other peace treaties entered into at the close of the first
World War, the general principles underlying such arrangements
are that the owners of properties seized, sequestrated or
impounded who are nationals of the victorious belligerent are
entitled to receive compensation for the loss or damage inflicted
on their property by the emergency war measures taken by the
enemy, through their respective States or Government who may
officially intervene and demand the payment of the claim on
behalf of their nationals (VI Hackworth Digest of International Law,
pp. 232, 233; II Oppenheim, sixth edition, p. 263). Naturally, as
the Japanese war notes were issued as legal tender for payment
of all kinds at par with the Philippine peso, by the Imperial
Japanese Government, which in its proclamations of January 3,
1942, and February 1, 1942, "takes full responsibility for their
usage having the correct amount to back them up" (see said
Proclamations and their official explanation, O. T., IMA Vol. 1, pp.
39, 40), Japan is bound to indemnify the aggrieved banks for the
loss or damage on their property, in terms of Philippine peso or U.
S. dollars at the rate of one dollar for two pesos.
10. OBLIGATIONS AND CONTRACTS; PAYMENT; PERSONS
AUTHORIZED
TO
RECEIVE"
;
LIQUIDATOR
OF
CORPORATION; CASE AT BAR. As the Japanese Military
Forces had power to sequestrate and impound the assets or
funds of the China Banking Corporation, and for that purpose to
liquidate it by collecting the debts due to said bank from its
debtors, and paying its creditors, and therefore to appoint the
Bank of Taiwan as liquidator with the consequent authority to
make the collection, it follows evidently that the payments by the
debtors to the Bank of Taiwan of their debts to the China Banking
Corporation have extinguished their obligation to the latter. Said
payments were made to a person, the Bank of Taiwan, authorized
to receive them in the name of the bank creditor under article
1162, of the Civil Code. Because it is evident the words "a person
authorized to receive it," as used therein, means not only a
person authorized by the same creditor, but also a person

authorized by law to do so, such as guardian, executor or

administrator of estate of a deceased, and assignee or liquidator
of a partnership or corporation, as well as any other who may be
authorized to do so by law (Manresa, Civil Code, 4th ed., p. 254).
11. ID.; ID.; JAPANESE WAR NOTES; LACK OF STIPULATION
LIMITING PAYMENT TO DEFINITE SPECIES OF MONEY.
The fact that the money with which the debts have been paid
were Japanese war notes does not affect the validity of the
payments. The provision of article 1170 of our Civil Code to the
effect that "payment of debts of money must be made in the
specie stipulated and if it is not possible to deliver such specie in
silver or gold coins which is a legal tender," is not applicable to
the present case, because the contract between the parties was
to pay Philippine pesos and not some specifically defined species
of money. The Philippine peso and half-pesos including the
Philippine Treasury Certificate was and is the legal tender in the
Philippines under section 612 of the Administrative Code, as
amended by Act No. 4199. As well stated by the Supreme Court
of the United States in Knox v. Lee and Parker (Legal Tender
Cases, 12 Wall., 457-681; 20 Law. ed., 287). "The expectation of
the creditor and the anticipation of the debtor may have been that
the contract would be discharged by the payment of coined
metals, but neither the expectation of one party to the contract,
respecting its fruits, nor the anticipation of the other, constitutes its
obligation. There is a well-recognized distinction between the
expectation of the parties to a contract and the duty imposed by it.
Aspdin v. Austin, 5 Ad. & Bl. (N. S.) 671; Dunn v. Sayles, Ibid.,
685; Coffin v. Landis, 46 Pa., 426. Were it not so, the expectation
of results would be always equivalent to a binding engagement
that they should follow. But the obligation of contract to pay
money is to pay that which the law shall recognize as money
when the payment is to be made. If there is anything settled by
decision it is this, and we do not understand it to be controverted."
(Know v. Exchange Bank of Virginia, 12 Wall., 457; 20 U. S.
Supreme Court Reports, 20 Law. ed., 287, 311.) In said case it
was held that the Legal Tender Acts of Congress which made the
treasury notes legal tender for payment of debts contracted
before and after their passage were not inappropriate for carrying
into execution the legitimate purpose of the Government. And this
court, in Rogers v. Smith Bell (10 Phil., 319), held that "A debt of
12,000 pesos created in 1876 can now (1908) be paid by 12,000
of the Philippine pesos authorized by the Act of Congress of
March 2, 1903, although at the time the loan was made which
created the debt, the creditor delivered to the debtor 12,000
pesos in gold coin."cralaw virtua1aw library
12. INTERNATIONAL LAW; BELLIGERENT OCCUPATION;
POWER OF MILITARY GOVERNMENT TO ISSUE CURRENCY.
The power of the military governments established in occupied
enemy territory to issue military currency in the exercise of their
governmental power has never been seriously questioned. Such
power is based, not only on the occupants general power to
maintain law and order recognized in article 43 of the Hague
Regulations (Feilchenfeld says in his treatise on International
Economic Law of Belligerent Occupation, par. 6), but on Military
necessity as shown by the history of the use of money or currency
in wars, related in the decision.
13. ID.; ID.; ID.; THREE METHODS ADOPTABLE BY MILITARY
OCCUPANT. According to Feilchenfeld in his book "The
International Economic Law of Belligerent Occupation," the
occupant in exercising his powers in regard to money and
currency, may adopt one of the following methods according to
circumstances: (1) When the coverage of the currency of the
territory occupied has become inadequate as found in several
Balkan countries during the War of 1914-18, and "the local
currency continues to be used, an occupant may reorganize the
national currency by appropriate methods, such as the creation of
new types and supplies of coverage" (paragraph 272). (2) The

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CORPORATION LAW | 80

occupant, may, and not infrequently, use his own currency, in the
occupied region. But this method may be found inconvenient if the
coverage for their national currency had already become
inadequate, and for that reason authorities are afraid of exposing
it to additional strain, and for that reason an occupant may not
replace the local currency by his own currency for all currency for
all purposes, and enforce its use not only for his own payment but
also for payments among inhabitants (paragraph 285). (3) Where
the regional currency has become inadequate and it is deemed
inadvisable by the occupant to expose his own currency to further
strain, new types of money may be created by the occupant. Such
new currency may have a new name and may be issued by
institution created for that purpose (paragraph 296). This last
method was the one adopted by Japan in this country, because
the coverage of the Philippine Treasury Certificate of the territory
occupied had become inadequate, for most if not all the said
coverage have been taken to the United States and many millions
of silver pesos were burried or thrown into the sea near
Corregidor, and Japan did not want to use her national currency,
and expose it to additional strains.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-14441

December 17, 1966

PEDRO R. PALTING, petitioner,

vs.
SAN JOSE PETROLEUM INCORPORATED, respondent.
1. CORPORATION; REGISTRATION AND SALE OF
SECURITIES; RIGHT TO FILE AN OPPOSITION TO APPEAL
FROM AN ADVERSE RULING OF THE SECURITIES AND
EXCHANGE COMMISSION; PURPOSES OF BLUE SKY LAWS.
The right to file an opposition to the registration of securities for
sale in the Philippines, and, in case of an adverse order, ruling or
decision by the Securities and Exchange Commission, to appeal
to the Supreme Court, is not limited to issues, dealers or
salesmen of securities. This is in consonance with the generally
accepted principle that BLUE Sky Laws are enacted to protect
investors and prospective purchasers and to prevent fraud and
preclude the sale of securities which are worthless or worth
substantially less than the asking price. Moreover, petitioner in the
case at bar became to all intents and purposes a party to the
proceedings. And under the New Rules of Court, which can be
applied here pursuant to Rule 144, he can appeal from a final
order, ruling or decision of the Securities and Exchange
Commission.
2. ID.; ID., ID.; WHEN SECURITIES ARE DEEMED
REGISTERED. The order under review allowing the
registration and sale of respondents securities is a final order that
is appealable. This is so because the securities are deemed
registered seven days after publication of the order (Section 7,
Commonwealth Act 83, as amended). The mere fact that the
authority may be later suspended or revoked, depending on future
developments, does not give it the character of an interlocutory or
provisional ruling.
3. ID.; ID.; WHEN INQUIRY AS TO THE WORTH OR LEGALITY
OF SECURITIES CAN BE MADE. Where the securities are
outstanding and are placed in the channels of trade and
commerce, members of the investing public are entitled to have

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CORPORATION LAW | 81

the question of the worth or legality of the securities resolved one

way or another. The purpose of the inquiry on the matter is not
fully served just because the securities has passed out of the
hands of the issuers and its dealers.
4. CONSTITUTIONAL LAW; UTILIZATION, EXPLOITATION AND
DEVELOPMENT OF NATURAL RESOURCES; PERSONS WHO
CAN EXERCISE THE PRIVILEGE. The privilege to utilize,
exploit and develop the natural resources of the Philippines was
granted by Article XIII of the Constitution, to Filipino citizens or to
corporations or associations 60% of the capital of which is owned
by such citizens. With the Parity Amendment to the Constitution,
the same right was extended to citizens of the United States and
business enterprise owned or controlled, directly or indirectly, by
citizens of the United States. There can be no serious doubt as to
the meaning of the word "citizens" used in the aforementioned
provisions of the Constitution. The right was granted to two types
of persons; natural persons (Filipino or American citizen) and
juridical persons (corporations 60% of which capital is owned by
Filipinos and business enterprises owned or controlled directly or
indirectly by citizens of the United States).
5. ID.; ID.; ID.; SAN JOSE PETROLEUM INCORPORATED NOT
AUTHORIZED TO EXERCISE PARITY PRIVILEGES. San
Jose Petroleum Incorporated is not owned or controlled directly
by citizens of the United States, because it is owned and
controlled by Oil Investments, Inc., another foreign (Panamanian)
corporation. Neither is it indirectly owned or controlled by
American citizens through Oil Investments, Inc., which is owned
and controlled, not by citizens of the United States, but by two
foreign (Venezuelan) corporations. There is no showing that the
stockholders in these two corporations are citizens of the United
States. But even granting that they are, it is still necessary to
establish that the different states of which they are citizens allow
Filipino citizens or corporations or associations owned or
controlled by Filipino citizens to engage in the exploitation, etc. of
the natural resources of these states (par. 3, Art. VI of the LaurelLangley Agreement). And even if these requirements are satisfied,
to hold that the set-up disclosed in the present case, with a long
chain of intervening foreign corporations, comes within the
purview of the Parity Amendment regarding business enterprises
indirectly owned or controlled by citizens of the United States, is
to unduly stretch and strain the language and intent of the law.
Hence, San Jose Petroleum. Incorporated as presently
constituted, is not a business enterprise that is authorized to
exercise the parity privilege under the Parity Ordinance, the
Laurel-Langley Agreement and the Petroleum Law. Its tie-up with
San Jose Oil Company, Inc. is consequently, illegal.
BARRERA, J.:
This is a petition for review of the order of August 29, 1958, later
supplemented and amplified by another dated September 9,
1958, of the Securities and Exchange Commission denying the
opposition to, and instead, granting the registration, and licensing
the sale in the Philippines, of 5,000,000 shares of the capital
stock of the respondent-appellee San Jose Petroleum, Inc.
(hereafter referred to as SAN JOSE PETROLEUM), a corporation
organized and existing in the Republic of Panama.
On September 7, 1956, SAN JOSE PETROLEUM filed with the
Philippine Securities and Exchange Commission a sworn
registration statement, for the registration and licensing for sale in
the Philippines Voting Trust Certificates representing 2,000,000
shares of its capital stock of a par value of $0.35 a share, at
P1.00 per share. It was alleged that the entire proceeds of the
sale of said securities will be devoted or used exclusively to
finance the operations of San Jose Oil Company, Inc. (a domestic

mining corporation hereafter to be referred to as SAN JOSE OIL)

which has 14 petroleum exploration concessions covering an area
of a little less than 1,000,000 hectares, located in the provinces of
Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo, Cotabato,
Davao and Agusan. It was the express condition of the sale that
every purchaser of the securities shall not receive a stock
certificate, but a registered or bearer-voting-trust certificate from
the voting trustees named therein James L. Buckley and Austin
G.E. Taylor, the first residing in Connecticut, U.S.A., and the
second in New York City. While this application for registration
was pending consideration by the Securities and Exchange
Commission, SAN JOSE PETROLEUM filed an amended
Statement on June 20, 1958, for registration of the sale in the
Philippines of its shares of capital stock, which was increased
from 2,000,000 to 5,000,000, at a reduced offering price of from
P1.00 to P0.70 per share. At this time the par value of the shares
has also been reduced from $.35 to $.01 per share.1
Pedro R. Palting and others, allegedly prospective investors in the
shares of SAN JOSE PETROLEUM, filed with the Securities and
Exchange Commission an opposition to registration and licensing
of the securities on the grounds that (1) the tie-up between the
issuer, SAN JOSE PETROLEUM, a Panamanian corporation and
SAN JOSE OIL, a domestic corporation, violates the Constitution
of the Philippines, the Corporation Law and the Petroleum Act of
1949; (2) the issuer has not been licensed to transact business in
the Philippines; (3) the sale of the shares of the issuer is
fraudulent, and works or tends to work a fraud upon Philippine
purchasers; and (4) the issuer as an enterprise, as well as its
business, is based upon unsound business principles. Answering
the foregoing opposition of Palting, et al., the registrant SAN
JOSE PETROLEUM claimed that it was a "business enterprise"
enjoying parity rights under the Ordinance appended to the
Constitution, which parity right, with respect to mineral resources
in the Philippines, may be exercised, pursuant to the LaurelLangley Agreement, only through the medium of a corporation
organized under the laws of the Philippines. Thus, registrant
which is allegedly qualified to exercise rights under the Parity
Amendment, had to do so through the medium of a domestic
corporation, which is the SAN JOSE OIL. It refused the contention
that the Corporation Law was being violated, by alleging that
Section 13 thereof applies only to foreign corporations doing
business in the Philippines, and registrant was not doing business
here. The mere fact that it was a holding company of SAN JOSE
OIL and that registrant undertook the financing of and giving
technical assistance to said corporation did not constitute
transaction of business in the Philippines. Registrant also denied
that the offering for sale in the Philippines of its shares of capital
stock was fraudulent or would work or tend to work fraud on the
investors. On August 29, 1958, and on September 9, 1958 the
Securities and Exchange Commissioner issued the orders object
of the present appeal.
The issues raised by the parties in this appeal are as follows:
1. Whether or not petitioner Pedro R. Palting, as a
"prospective investor" in respondent's securities, has
personality to file the present petition for review of the
order of the Securities and Exchange Commission;
2. Whether or not the issue raised herein is already
moot and academic;
3. Whether or not the "tie-up" between the respondent
SAN JOSE PETROLEUM, a foreign corporation, and
SAN JOSE OIL COMPANY, INC., a domestic mining
corporation, is violative of the Constitution, the Laurel-

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Langley Agreement, the Petroleum Act of 1949, and the

Corporation Law; and
4. Whether or not the sale of respondent's securities is
fraudulent, or would work or tend to work fraud to
purchasers of such securities in the Philippines.
1. In answer to the notice and order of the Securities and
Exchange Commissioner, published in 2 newspapers of general
circulation in the Philippines, for "any person who is opposed" to
the petition for registration and licensing of respondent's
securities, to file his opposition in 7 days, herein petitioner so filed
an opposition. And, the Commissioner, having denied his
opposition and instead, directed the registration of the securities
to be offered for sale, oppositor Palting instituted the present
proceeding for review of said order.
Respondent raises the question of the personality of petitioner to
bring this appeal, contending that as a mere "prospective
investor", he is not an "Aggrieved" or "interested" person who may
properly maintain the suit. Citing a 1931 ruling of Utah State
Supreme Court2 it is claimed that the phrase "party aggrieved"
used in the Securities Act 3 and the Rules of Court4 as having the
right to appeal should refer only to issuers, dealers and salesmen
of securities.
It is true that in the cited case, it was ruled that the phrase
"person aggrieved" is that party "aggrieved by the judgment or
decree where it operates on his rights of property or bears directly
upon his interest", that the word "aggrieved" refers to "a
substantial grievance, a denial of some personal property right or
the imposition upon a party of a burden or obligation." But a
careful reading of the case would show that the appeal therein
was dismissed because the court held that an order of registration
was not final and therefore not appealable. The foregoing
pronouncement relied upon by herein respondent was made in
construing the provision regarding an order of revocation which
the court held was the one appealable. And since the law
provides that in revoking the registration of any security, only the
issuer and every registered dealer of the security are notified,
excluding any person or group of persons having no such interest
in the securities, said court concluded that the phrase "interested
person" refers only to issuers, dealers or salesmen of securities.
We cannot consider the foregoing ruling by the Utah State Court
as controlling on the issue in this case. Our Securities Act in
Section 7(c) thereof, requires the publication and notice of the
registration statement. Pursuant thereto, the Securities and
Exchange Commissioner caused the publication of an order in
part reading as follows:
. . . Any person who is opposed with this petition must
file his written opposition with this Commission within
said period (2 weeks). . . .
In other words, as construed by the administrative office entrusted
with the enforcement of the Securities Act, any person (who may
not be "aggrieved" or "interested" within the legal acceptation of
the word) is allowed or permitted to file an opposition to the
registration of securities for sale in the Philippines. And this is in
consonance with the generally accepted principle that Blue Sky
Laws are enacted to protect investors and prospective purchasers
and to prevent fraud and preclude the sale of securities which are
in fact worthless or worth substantially less than the asking price.
It is for this purpose that herein petitioner duly filed his opposition
giving grounds therefor. Respondent SAN JOSE PETROLEUM

was required to reply to the opposition. Subsequently both the

petition and the opposition were set for hearing during which the
petitioner was allowed to actively participate and did so by crossexamining the respondent's witnesses and filing his memorandum
in support of his opposition. He therefore to all intents and
purposes became a party to the proceedings. And under the New
Rules of Court,5 such a party can appeal from a final order, ruling
or decision of the Securities and Exchange Commission. This
new Rule eliminating the word "aggrieved" appearing in the old
Rule, being procedural in nature,6 and in view of the express
provision of Rule 144 that the new rules made effective on
January 1, 1964 shall govern not only cases brought after they
took effect but all further proceedings in cases then pending,
except to the extent that in the opinion of the Court their
application would not be feasible or would work injustice, in which
event the former procedure shall apply, we hold that the present
appeal is properly within the appellate jurisdiction of this Court.
The order allowing the registration and sale of respondent's
securities is clearly a final order that is appealable. The mere fact
that such authority may be later suspended or revoked,
depending on future developments, does not give it the character
of an interlocutory or provisional ruling. And the fact that seven
days after the publication of the order, the securities are deemed
registered (Sec. 7, Com. Act 83, as amended), points to the
finality of the order. Rights and obligations necessarily arise
therefrom if not reviewed on appeal.
Our position on this procedural matter that the order is
appealable and the appeal taken here is proper is
strengthened by the intervention of the Solicitor General, under
Section 23 of Rule 3 of the Rules of Court, as the constitutional
issues herein presented affect the validity of Section 13 of the
Corporation Law, which, according to the respondent, conflicts
with the Parity Ordinance and the Laurel-Langley Agreement
recognizing, it is claimed, its right to exploit our petroleum
resources notwithstanding said provisions of the Corporation Law.
2. Respondent likewise contends that since the order of
Registration/Licensing dated September 9, 1958 took effect 30
days from September 3, 1958, and since no stay order has been
issued by the Supreme Court, respondent's shares became
registered and licensed under the law as of October 3, 1958.
Consequently, it is asserted, the present appeal has become
academic. Frankly we are unable to follow respondent's
argumentation. First it claims that the order of August 29 and that
of September 9, 1958 are not final orders and therefor are not
appealable. Then when these orders, according to its theory
became final and were implemented, it argues that the orders can
no longer be appealed as the question of registration and
licensing became moot and academic.
But the fact is that because of the authority to sell, the securities
are, in all probabilities, still being traded in the open market.
Consequently the issue is much alive as to whether respondent's
securities should continue to be the subject of sale. The purpose
of the inquiry on this matter is not fully served just because the
securities had passed out of the hands of the issuer and its
dealers. Obviously, so long as the securities are outstanding and
are placed in the channels of trade and commerce, members of
the investing public are entitled to have the question of the worth
or legality of the securities resolved one way or another.
But more fundamental than this consideration, we agree with the
late Senator Claro M. Recto, who appeared as amicus curiae in
this case, that while apparently the immediate issue in this appeal
is the right of respondent SAN JOSE PETROLEUM to dispose of

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and sell its securities to the Filipino public, the real and ultimate
controversy here would actually call for the construction of the
constitutional provisions governing the disposition, utilization,
exploitation and development of our natural resources. And
certainly this is neither moot nor academic.
3. We now come to the meat of the controversy the "tie-up"
between SAN JOSE OIL on the one hand, and the respondent
SAN JOSE PETROLEUM and its associates, on the other. The
relationship of these corporations involved or affected in this case
is admitted and established through the papers and documents
which are parts of the records: SAN JOSE OIL, is a domestic
mining corporation, 90% of the outstanding capital stock of which
is owned by respondent SAN JOSE PETROLEUM, a foreign
(Panamanian) corporation, the majority interest of which is owned
by OIL INVESTMENTS, Inc., another foreign (Panamanian)
company. This latter corporation in turn is wholly (100%) owned
by PANTEPEC OIL COMPANY, C.A., and PANCOASTAL
PETROLEUM COMPANY, C.A., both organized and existing
under the laws of Venezuela. As of September 30, 1956, there
were 9,976 stockholders of PANCOASTAL PETROLEUM found in
49 American states and U.S. territories, holding 3,476,988 shares
of stock; whereas, as of November 30, 1956, PANTEPEC OIL
COMPANY was said to have 3,077,916 shares held by 12,373
stockholders scattered in 49 American state. In the two lists of
stockholders, there is no indication of the citizenship of these
stockholders,7 or of the total number of authorized stocks of each
corporation, for the purpose of determining the corresponding
percentage of these listed stockholders in relation to the
respective capital stock of said corporation.
Petitioner, as well as the amicus curiae and the Solicitor General8
contend that the relationship between herein respondent SAN
JOSE PETROLEUM and its subsidiary, SAN JOSE OIL, violates
the Petroleum Law of 1949, the Philippine Constitution, and
Section 13 of the Corporation Law, which inhibits a mining
corporation from acquiring an interest in another mining
corporation. It is respondent's theory, on the other hand, that far
from violating the Constitution; such relationship between the two
corporations is in accordance with the Laurel-Langley Agreement
which implemented the Ordinance Appended to the Constitution,
and that Section 13 of the Corporation Law is not applicable
because respondent is not licensed to do business, as it is not
doing business, in the Philippines.
Article XIII, Section 1 of the Philippine Constitution provides:
SEC. 1. All agricultural, timber, and mineral lands of the
public domain, waters, minerals, coal, petroleum, and
other mineral oils, all forces of potential energy, and
other natural resources of the Philippines belong to the
State, and their disposition, exploitation, development,
or utilization shall be limited to citizens of the
Philippines, or to corporations or associations at least
sixty per centum of the capital of which is owned by
such citizens, subject to any existing right, grant, lease
or concession at the time of the inauguration of this
Government established under this Constitution. . . .
(Emphasis supplied)
In the 1946 Ordinance Appended to the Constitution, this right (to
utilize and exploit our natural resources) was extended to citizens
of the United States, thus:
Notwithstanding the provisions of section one, Article
Thirteen, and section eight, Article Fourteen, of the
foregoing Constitution, during the effectivity of the

Executive Agreement entered into by the President of

the Philippines with the President of the United States
on the fourth of July, nineteen hundred and forty-six,
pursuant to the provisions of Commonwealth Act
Numbered Seven hundred and thirty-three, but in no
case to extend beyond the third of July, nineteen
hundred and seventy-four, the disposition, exploitation,
development, and utilization of all agricultural, timber,
and mineral lands of the public domain, waters,
minerals, coal, petroleum, and other mineral oils, all
forces of potential energy, and other natural resources
of the Philippines, and the operation of public utilities
shall, if open to any person, be open to citizens of the
United States, and to all forms of business enterprises
owned or controlled, directly or indirectly, by citizens of
the United States in the same manner as to, and under
the same conditions imposed upon, citizens of the
Philippines or corporations or associations owned or
controlled by citizens of the Philippines (Emphasis
supplied.)
In the 1954 Revised Trade Agreement concluded between the
United States and the Philippines, also known as the LaurelLangley Agreement, embodied in Republic Act 1355, the following
provisions appear:
ARTICLE VI
1. The disposition, exploitation, development and
utilization of all agricultural, timber, and mineral lands of
the public domain, waters, minerals, coal, petroleum
and other mineral oils, all forces and sources of
potential energy, and other natural resources of either
Party, and the operation of public utilities, shall, if open
to any person, be open to citizens of the other Party
and to all forms of business enterprise owned or
controlled, directly or indirectly, by citizens of such
other Party in the same manner as to and under the
same conditions imposed upon citizens or corporations
or associations owned or controlled by citizens of the
Party granting the right.
2. The rights provided for in Paragraph 1 may be
exercised, . . . in the case of citizens of the United
States, with respect to natural resources in the public
domain in the Philippines, only through the medium of a
corporation organized under the laws of the Philippines
and at least 60% of the capital stock of which is owned
or controlled by citizens of the United States. . . .
3. The United States of America reserves the rights of
the several States of the United States to limit the
extent to which citizens or corporations or associations
owned or controlled by citizens of the Philippines may
engage in the activities specified in this Article. The
Republic of the Philippines reserves the power to deny
any of the rights specified in this Article to citizens of
the United States who are citizens of States, or to
corporations or associations at least 60% of whose
capital stock or capital is owned or controlled by
citizens of States, which deny like rights to citizens of
the Philippines, or to corporations or associations which
are owned or controlled by citizens of the
Philippines. . . . (Emphasis supplied.)
Re-stated, the privilege to utilize, exploit, and develop the natural
resources of this country was granted, by Article XIII of the

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CORPORATION LAW | 84

Constitution, to Filipino citizens or to corporations or associations

60% of the capital of which is owned by such citizens. With the
Parity Amendment to the Constitution, the same right was
extended to citizens of the United States and business
enterprises owned or controlled directly or indirectly, by citizens of
the United States.
There could be no serious doubt as to the meaning of the word
"citizens" used in the aforementioned provisions of the
Constitution. The right was granted to 2 types of persons: natural
persons (Filipino or American citizens) and juridical persons
(corporations 60% of which capital is owned by Filipinos and
business enterprises owned or controlled directly or indirectly, by
citizens of the United States). In American law, "citizen" has been
defined as "one who, under the constitution and laws of the
United States, has a right to vote for representatives in congress
and other public officers, and who is qualified to fill offices in the
gift of the people. (1 Bouvier's Law Dictionary, p. 490.) A citizen is

One of the sovereign people. A constituent member of

the sovereignty, synonymous with the people." (Scott v.
Sandford, 19 Ho. [U.S.] 404, 15 L. Ed. 691.)
A member of the civil state entitled to all its privileges.
(Cooley, Const. Lim. 77. See U.S. v. Cruikshank 92
U.S. 542, 23 L. Ed. 588; Minor v. Happersett 21 Wall.
[U.S.] 162, 22 L. Ed. 627.)
These concepts clarified, is herein respondent SAN JOSE
PETROLEUM an American business enterprise entitled to parity
rights in the Philippines? The answer must be in the negative, for
the following reasons:
Firstly It is not owned or controlled directly by citizens of the
United States, because it is owned and controlled by a
corporation, the OIL INVESTMENTS, another foreign
(Panamanian) corporation.
Secondly Neither can it be said that it is indirectly owned and
controlled by American citizens through the OIL INVESTMENTS,
for this latter corporation is in turn owned and controlled, not by
citizens of the United States, but still by two foreign (Venezuelan)
corporations, the PANTEPEC OIL COMPANY and PANCOASTAL
PETROLEUM.
Thirdly Although it is claimed that these two last corporations
are owned and controlled respectively by 12,373 and 9,979
stockholders residing in the different American states, there is no
showing in the certification furnished by respondent that the
stockholders of PANCOASTAL or those of them holding the
controlling stock, are citizens of the United States.
Fourthly Granting that these individual stockholders are
American citizens, it is yet necessary to establish that the different
states of which they are citizens, allow Filipino citizens or
corporations or associations owned or controlled by Filipino
citizens, to engage in the exploitation, etc. of the natural
resources of these states (see paragraph 3, Article VI of the
Laurel-Langley Agreement, supra). Respondent has presented no
proof to this effect.
Fifthly But even if the requirements mentioned in the two
immediately preceding paragraphs are satisfied, nevertheless to
hold that the set-up disclosed in this case, with a long chain of

intervening foreign corporations, comes within the purview of the

Parity Amendment regarding business enterprises indirectly
owned or controlled by citizens of the United States, is to unduly
stretch and strain the language and intent of the law. For, to what
extent must the word "indirectly" be carried? Must we trace the
ownership or control of these various corporations ad infinitum for
the purpose of determining whether the American ownershipcontrol-requirement is satisfied? Add to this the admitted fact that
the shares of stock of the PANTEPEC and PANCOASTAL which
are allegedly owned or controlled directly by citizens of the United
States, are traded in the stock exchange in New York, and you
have a situation where it becomes a practical impossibility to
determine at any given time, the citizenship of the controlling
stock required by the law. In the circumstances, we have to hold
that the respondent SAN JOSE PETROLEUM, as presently
constituted, is not a business enterprise that is authorized to
exercise the parity privileges under the Parity Ordinance, the
Laurel-Langley Agreement and the Petroleum Law. Its tie-up with
SAN JOSE OIL is, consequently, illegal.
What, then, would be the Status of SAN JOSE OIL, about 90% of
whose stock is owned by SAN JOSE PETROLEUM? This is a
query which we need not resolve in this case as SAN JOSE OIL
is not a party and it is not necessary to do so to dispose of the
present controversy. But it is a matter that probably the Solicitor
General would want to look into.
There is another issue which has been discussed extensively by
the parties. This is whether or not an American mining corporation
may lawfully "be in anywise interested in any other corporation
(domestic or foreign) organized for the purpose of engaging in
agriculture or in mining," in the Philippines or whether an
American citizen owning stock in more than one corporation
organized for the purpose of engaging in agriculture or in mining,
may own more than 15% of the capital stock then outstanding
and entitled to vote, of each of such corporations, in view of the
express prohibition contained in Section 13 of the Philippine
Corporation Law. The petitioner in this case contends that the
provisions of the Corporation Law must be applied to American
citizens and business enterprise otherwise entitled to exercise the
parity privileges, because both the Laurel-Langley Agreement
(Art. VI, par. 1) and the Petroleum Act of 1948 (Art. 31),
specifically provide that the enjoyment by them of the same rights
and obligations granted under the provisions of both laws shall be
"in the same manner as to, and under the same conditions
imposed upon, citizens of the Philippines or corporations or
associations owned or controlled by citizens of the Philippines."
The petitioner further contends that, as the enjoyment of the
privilege of exploiting mineral resources in the Philippines by
Filipino citizens or corporations owned or controlled by citizens of
the Philippines (which corporation must necessarily be organized
under the Corporation Law), is made subject to the limitations
provided in Section 13 of the Corporation Law, so necessarily the
exercise of the parity rights by citizens of the United States or
business enterprise owned or controlled, directly or indirectly, by
citizens of the United States, must equally be subject to the same
limitations contained in the aforesaid Section 13 of the
Corporation Law.
In view of the conclusions we have already arrived at, we deem it
not indispensable for us to pass upon this legal question,
especially taking into account the statement of the respondent
(SAN JOSE PETROLEUM) that it is essentially a holding
company, and as found by the Securities and Exchange
Commissioner, its principal activity is limited to the financing and
giving technical assistance to SAN JOSE OIL.

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CORPORATION LAW | 85

4. Respondent SAN JOSE PETROLEUM, whose shares of stock

were allowed registration for sale in the Philippines, was
incorporated under the laws of Panama in April, 1956 with an
authorized capital stock of $500,000.00, American currency,
divided into 50,000,000 shares at par value of $0.01 per share. By
virtue of a 3-party Agreement of June 14, 1956, respondent was
supposed to have received from OIL INVESTMENTS 8,000,000
shares of the capital stock of SAN JOSE OIL (at par value of
$0.01 per share), plus a note for $250,000.00 due in 6 months, for
which respondent issued in favor of OIL INVESTMENTS
16,000,000 shares of its capital stock, at $0.01 per share or with a
value of $160,000.00, plus a note for $230,297.97 maturing in 2
years at 6% per annum interest,9 and the assumption of payment
of the unpaid price of 7,500,000 (of the 8,000,000 shares of SAN
JOSE OIL).
On June 27, 1956, the capitalization of SAN JOSE PETROLEUM
was increased from $500,000.00 to $17,500,000.00 by increasing
the par value of the same 50,000,000 shares, from $0.01 to
$0.35. Without any additional consideration, the 16,000,000
shares of $0.01 previously issued to OIL INVESTMENTS with a
total value of $160,000.00 were changed with 16,000,000 shares
of the recapitalized stock at $0.35 per share, or valued at
$5,600,000.00. And, to make it appear that cash was received for
these re-issued 16,000,000 shares, the board of directors of
respondent corporation placed a valuation of $5,900,000.00 on
the 8,000,000 shares of SAN JOSE OIL (still having par value of
$0.10 per share) which were received from OIL INVESTMENTS
as part-consideration for the 16,000,000 shares at $0.01 per
share.
In the Balance Sheet of respondent, dated July 12, 1956, from the
$5,900,000.00, supposedly the value of the 8,000,000 shares of
SAN JOSE OIL, the sum of $5,100,000.00 was deducted,
corresponding to the alleged difference between the "value" of the
said shares and the subscription price thereof which is
$800,000.00 (at $0.10 per share). From this $800,000.00, the
subscription price of the SAN JOSE OIL shares, the amount of
$319,702.03 was deducted, as allegedly unpaid subscription
price, thereby giving a difference of $480,297.97, which was
placed as the amount allegedly paid in on the subscription price of
the 8,000,000 SAN JOSE OIL shares. Then, by adding thereto the
note receivable from OIL INVESTMENTS, for $250,000.00 (partconsideration for the 16,000,000 SAN JOSE PETROLEUM
shares), and the sum of $6,516.21, as deferred expenses, SAN
JOSE PETROLEUM appeared to have assets in the sum of
$736,814.18.
These figures are highly questionable. Take the item
$5,900,000.00 the valuation placed on the 8,000,000 shares of
SAN JOSE OIL. There appears no basis for such valuation other
than belief by the board of directors of respondent that "should
San Jose Oil Company be granted the bulk of the concessions
applied for upon reasonable terms, that it would have a
reasonable value of approximately $10,000,000." 10 Then, of this
amount, the subscription price of $800,000.00 was deducted and
called it "difference between the (above) valuation and the
subscription price for the 8,000,000 shares." Of this $800,000.00
subscription price, they deducted the sum of $480,297.97 and the
difference was placed as the unpaid portion of the subscription
price. In other words, it was made to appear that they paid in
$480,297.97 for the 8,000,000 shares of SAN JOSE OIL. This
amount ($480,297.97) was supposedly that $250,000.00 paid by
OIL INVESMENTS for 7,500,000 shares of SAN JOSE OIL,
embodied in the June 14 Agreement, and a sum of $230,297.97
the amount expended or advanced by OIL INVESTMENTS to
SAN JOSE OIL. And yet, there is still an item among respondent's
liabilities, for $230,297.97 appearing as note payable to Oil

Investments, maturing in two (2) years at six percent (6%) per

annum. 11 As far as it appears from the records, for the
16,000,000 shares at $0.35 per share issued to OIL
INVESTMENTS, respondent SAN JOSE PETROLEUM received
from OIL INVESTMENTS only the note for $250,000.00 plus the
8,000,000 shares of SAN JOSE OIL, with par value of $0.10 per
share or a total of $1,050,000.00 the only assets of the
corporation. In other words, respondent actually lost
$4,550,000.00, which was received by OIL INVESTMENTS.
But this is not all. Some of the provisions of the Articles of
Incorporation of respondent SAN JOSE PETROLEUM are
noteworthy; viz:
(1) the directors of the Company need not be
shareholders;
(2) that in the meetings of the board of directors, any
director may be represented and may vote through a
proxy who also need not be a director or stockholder;
and
(3) that no contract or transaction between the
corporation and any other association or partnership
will be affected, except in case of fraud, by the fact that
any of the directors or officers of the corporation is
interested in, or is a director or officer of, such other
association or partnership, and that no such contract or
transaction of the corporation with any other person or
persons, firm, association or partnership shall be
affected by the fact that any director or officer of the
corporation is a party to or has an interest in, such
contract or transaction, or has in anyway connected
with such other person or persons, firm, association or
partnership; and finally, that all and any of the persons
who may become director or officer of the corporation
shall be relieved from all responsibility for which they
may otherwise be liable by reason of any contract
entered into with the corporation, whether it be for his
benefit or for the benefit of any other person, firm,
association or partnership in which he may be
interested.
These provisions are in direct opposition to our corporation law
and corporate practices in this country. These provisions alone
would outlaw any corporation locally organized or doing business
in this jurisdiction. Consider the unique and unusual provision that
no contract or transaction between the company and any other
association or corporation shall be affected except in case of
fraud, by the fact that any of the directors or officers of the
company may be interested in or are directors or officers of such
other association or corporation; and that none of such contracts
or transactions of this company with any person or persons, firms,
associations or corporations shall be affected by the fact that any
director or officer of this company is a party to or has an interest
in such contract or transaction or has any connection with such
person or persons, firms associations or corporations; and that
any and all persons who may become directors or officers of this
company are hereby relieved of all responsibility which they would
otherwise incur by reason of any contract entered into which this
company either for their own benefit, or for the benefit of any
person, firm, association or corporation in which they may be
interested.
The impact of these provisions upon the traditional judiciary
relationship between the directors and the stockholders of a
corporation is too obvious to escape notice by those who are

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CORPORATION LAW | 86

called upon to protect the interest of investors. The directors and

officers of the company can do anything, short of actual fraud,
with the affairs of the corporation even to benefit themselves
directly or other persons or entities in which they are interested,
and with immunity because of the advance condonation or relief
from responsibility by reason of such acts. This and the other
provision which authorizes the election of non-stockholders as
directors, completely disassociate the stockholders from the
government and management of the business in which they have
invested.

Castro, J., took no part.

To cap it all on April 17, 1957, admittedly to assure continuity of

the management and stability of SAN JOSE PETROLEUM, OIL
INVESTMENTS, as holder of the only subscribed stock of the
former corporation and acting "on behalf of all future holders of
voting trust certificates," entered into a voting trust agreement12
with James L. Buckley and Austin E. Taylor, whereby said
Trustees were given authority to vote the shares represented by
the outstanding trust certificates (including those that may
henceforth be issued) in the following manner:
(a) At all elections of directors, the Trustees will
designate a suitable proxy or proxies to vote for the
election of directors designated by the Trustees in their
own discretion, having in mind the best interests of the
holders of the voting trust certificates, it being
understood that any and all of the Trustees shall be
eligible for election as directors;
(b) On any proposition for removal of a director, the
Trustees shall designate a suitable proxy or proxies to
vote for or against such proposition as the Trustees in
their own discretion may determine, having in mind the
best interest of the holders of the voting trust
certificates;
(c) With respect to all other matters arising at any
meeting of stockholders, the Trustees will instruct such
proxy or proxies attending such meetings to vote the
shares of stock held by the Trustees in accordance with
the written instructions of each holder of voting trust
certificates. (Emphasis supplied.)
It was also therein provided that the said Agreement shall be
binding upon the parties thereto, their successors, and upon all
holders of voting trust certificates.
And these are the voting trust certificates that are offered to
investors as authorized by Security and Exchange Commissioner.
It can not be doubted that the sale of respondent's securities
would, to say the least, work or tend to work fraud to Philippine
investors.
FOR ALL THE FOREGOING CONSIDERATIONS, the motion of
respondent to dismiss this appeal, is denied and the orders of the
Securities and Exchange Commissioner, allowing the registration
of Respondent's securities and licensing their sale in the
Philippines are hereby set aside. The case is remanded to the
Securities and Exchange Commission for appropriate action in
consonance with this decision. With costs. Let a copy of this
decision be furnished the Solicitor General for whatever action he
may deem advisable to take in the premises. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal,
Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 124950 May 19, 1998

ASIONICS PHILIPPINES, INC. and/or FRANK YIH, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION, YOLANDA
BOAQUINA, and JUANA GAYOLA, respondents.
RESOLUTION
VITUG, J.:
In this special civil action of certiorari, petitioners Asionics
Philippines, Inc. ("API"), and its President and majority
stockholder, Frank Yih, seek to annul and set aside the decision, 1
dated 19 May 1996, of the National Labor Relations Commission
("NLRC") which has ordered, inter alia, that they grant separation
pay, computed at one-half (1/2) month per year of service, to
private respondents Yolanda Boaquina and Juana Gayola.
Concomitantly being contested is the subsequent 16th April 1996
resolution 2 of the NLRC denying petitioners' motion for
reconsideration.
API is a domestic corporation engaged in the business of
assembling semi-conductor chips and other electronic products
mainly for export. Yolanda Boaquina and Juana Gayola started
working for API in 1979 and 1988, respectively, as material control
clerk and as production operator. During the third quarter of 1992,
API commenced negotiations with the duly recognized bargaining
agent of its employees, the Federation of Free Workers ("FFW"),
for a Collective Bargaining Agreement ("CBA"). A deadlock,
however, ensued and the union decided to file a notice of strike.
This event prompted the two customers of API, Indala and CP
Clare Theta J, to thereupon refrain from sending to API additional
kits or materials for assembly. API, given the circumstance that its
assembly line had to thereby grind to a halt, was forced to

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suspend operations pursuant to Article 286 3 of the Labor Code.

Private respondents Boaquina and Gayola were among the
employees asked to take a leave from work.
Upon the resolution of the bargaining deadlock in October of
1992, a CBA was concluded between API and FFW. The contract
was signed on 30 October 1992 by the parties. Respondent
Boaquina was directed to report back since her previous
assignment pertained to the issuance of raw materials needed for
the production of electronic items being ordered by Indala, one of
API's client which promptly resumed its business with API. On the
other hand, Juana Gayola, among other employees, could not be
recalled forthwith because the CP Clare/Theta J account, where
she was assigned as the production operator, had yet to renew its
production orders.
Inasmuch as its business activity remained critical, API was
constrained to implement a company-wide retrenchment affecting
one hundred five (105) employees from a work force that
otherwise totalled three hundred four (304). The selection was
based on productivity/performance standards pursuant to the
CBA. Yolanda Boaquina was one of those affected by the
retrenchment and API, through its Personnel Manager Beatriz G.
Torro, advised her of such fact in its letter of 29 December 1992.
In that letter, Boaquina was informed that her services were to be
dispensed with effective 31 January 1993 4 although she did not
have to render any service for the month of January she being by
then already considered to be on leave with pay. While Juana
Gayola was not supposed to be affected by the retrenchment in
view of her high performance rating, her services, nevertheless,
were considered to have been ended on 04 September 1992 5
when she was ordered by API to take an indefinite leave of
absence. She had not since been recalled.
Dissatisfied with their union (FFW), Boaquina and Gayola,
together with some of other co-employees, joined the Lakas ng
Manggagawa sa Pilipinas Labor Union ("Lakas Union") where
they eventually became members of its Board of Directors.
On 06 January 1993, Lakas Union filed a notice of strike against
API on the ground of unfair labor practice ("ULP") allegedly
committed by the latter, specifically, for union busting, termination
of union officers/members, harassment and discrimination. 6 A
conciliation meeting was scheduled for 08 January 1993 by the
National Conciliation and Mediation Board ("NCMB") to address
the problem which meeting, however, was reset to 14 January
1993 for failure of any representative or member of Lakas Union
to appear. On 10 January 1993, Lakas Union staged a strike.
Claiming that the strike staged by Lakes Union was illegal, API on
11 January 1993, brought before the NLRC National Capital
Region Arbitration a petition, docketed NLRC NCR Case No. 0001-00402-93, for declaration of illegality of the strike. Lakas Union
countered that their strike was valid and staged as a measure of
self-preservation and as self-defense against the illegal dismissal
of petitioners aimed at union busting in the guise of a
retrenchment program.
On 23 June 1994, Labor Arbiter Villarente, Jr., to whose sala the
case was raffled, promulgated a decision 7 declaring the strike
staged by Lakas Union to be illegal. He declared:
WHEREFORE, judgment is hereby rendered declaring
that the strike staged by respondents Federation of
Free Workers and the Lakas Manggagawa ng Pilipinas
on January 10, 1993 and thereafter, was ILLEGAL.

Accordingly, all the registered officers of the two

respondent-Unions at the time of the strike are hereby
declared to have lost their employment status (aside
from the fact that ten of them earlier mentioned had
settled their cases amicably with petitioner).
Insofar as the striking members are concerned and who
did not settle their cases amicably, their separation from
the service of petitioner API is hereby declared VALID
under the company-wide retrenchment program which
was earlier made known to proper authorities.
SO ORDERED. 8
Meanwhile, at the instance of several employees which included
private respondents Boaquina and Gayola, a complaint for illegal
dismissal, violation of labor standards and separation pay, as well
as for recovery of moral and exemplary damages, was filed
against API and/or Frank Yih before the NLRC National Capital
Region Arbitration Branch. The illegal dismissal case, docketed
NLRC NCR Case No. 00-05-03326 and No. 00-03-01952-93, was
assigned to Labor Arbiter Potenciano S. Canizares, Jr.
On 22 June 1994, Labor Arbiter Canizares rendered his decision 9
holding petitioners guilty of illegal dismissal. He ordered
petitioners to pay private respondent Yolanda Boaquina
separation pay of one-half (1/2) month pay for every year of
service, plus overtime pay, and to reinstate private respondent
Juana Gayola with full backwages from the time her salaries were
withheld from her until her actual reinstatement.
The decision of Labor Arbiter Villarente, Jr., and that of Labor
Arbiter Canizares were both appealed to the NLRC.
On 20 April 1995, the Third Division of NLRC promulgated its
resolution 10 to which affirmed the finding of Labor Arbiter
Villarente, Jr., that the strike staged by Lakas Union was illegal.
On 19 March 1996, the same Third Division of NLRC, in the illegal
dismissal case, rendered a decision 11 modifying the decision of
Labor Arbiter Canizares by declaring that private respondents
were not illegally dismissed but were validly terminated due to the
retrenchment policy implemented by API. Accordingly, private
respondents were awarded separation pay and an additional one
(1) month salary in favor of Juana Gayola by way of indemnity for
petitioner API's failure to properly inform her of the retrenchment.
The NLRC dismissed the claim of petitioners that private
respondents should not be entitled to separation pay because of
their involvement in the strike which was declared illegal.
On 01 April 1996, petitioners moved for a reconsideration of the
19th March 1996 NLRC decision; the motion, however, was
denied by the NLRC in its resolution of 16 April 1996.
In this recourse, the following issues have been raised by
petitioners; to wit:
WHETHER OR NOT PRIVATE RESPONDENTS WHO
ARE OFFICERS OF THE UNION ARE STILL
ENTITLED TO SEPARATION PAY AND INDEMNITY
DESPITE HAVING PARTICIPATED IN A STRIKE THAT
HAS BEEN DECLARED ILLEGAL?
WHETHER
OR
NOT
A
STOCKHOLDER/DIRECTOR/OFFICER
OF
A
CORPORATION CAN BE HELD LIABLE FOR THE

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CORPORATION LAW | 88

OBLIGATION OF THE CORPORATION ABSENT ANY

PROOF AND FINDING OF BAD FAITH? 12
The position advanced by petitioners on the first issue is bereft of
merit. It is quite evident that the termination of employment of
private respondent was due to the retrenchment policy adopted
by API and not because of the former's union activities. In a letter,
dated 29 December 1992, API itself advised respondent Boaquina
that she was one of those affected by the retrenchment program
of the company and that her services were to be deemed
terminated effective 31 January 1993. In their pleadings submitted
to Labor Arbiter Canizares, Jr., in connection with the illegal
dismissal case, petitioners firmly averred that the services of
private respondents were being dispensed with not by reason of
their union activities but in view of the retrenchment policy of the
company. The Solicitor-General correctly pointed out the
admissions made by petitioners; thus:
The fact is, complainant Boaquina was in fact part of
the first batch of retrenchees. She was duly notified of
her retrenchment, as well as the proper labor
authorities. Ms. Boaquina alleged in her position
paper/affidavit that:
[O]n September 12, 1992, I was
illegally laid-off for no reason that I
know other than my union
activities. I was recalled on October
6, 1992 and again I was laid-off in
a memorandum of January 4, 1993
effective the end of said month.

The decision of Labor Arbiter Villarente, Jr., declaring private

respondents to have lost their employment status due to their
participation in an illegal strike is of no really significance to
petitioners. It should suffice to say, as so aptly observed by the
NLRC, that the retrenchment of private respondents has, in fact,
preceded the declaration of strike.
It is, instead, on the issue of joint and solidary liability of petitioner
Frank Yih with API that the Court has decided to give due course
to the instant petition. The court cannot agree with the SolicitorGeneral in suggesting that even if Frank Yih had no direct hand in
the dismissal of the respondents he should be personally liable
therefor on account alone of his being the President and majority
stockholder of the company. The disquisition by the Court in
Santos vs. NLRC 14 is quite succinct and clear. Thus
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 people comprising it.
The rule is that obligations incurred by the corporation,
acting through its directors, officers and employees, are
its sole liabilities. Nevertheless, being a mere fiction of
law, peculiar situations or valid grounds can exist to
warrant, albeit done sparingly, the disregard of its
independent being and the lifting of the corporate veil.
As a rule, this situation might arise when a corporation
is used to evade a just and due obligation or to justify a
wrong, to shield or perpetrate fraud, to carry out similar
unjustifiable aims or intentions, or as a subterfuge to
commit injustice and so circumvent the law.
xxx xxx xxx

Complainant Boaquina of course failed, obvious

wittingly, to tell her story truthfully. In the first place, she
was never terminated for her union activities. Asionics
just concluded its CBA with the employees' bargaining
representative. Asionics were also too preoccupied with
more earthshaking and exigent problems, principally
that of getting the business back on its feet, to concern
themselves with potential (whether real or imagined)
entanglements/complications with the union, much less
of one individual member. Moreover, for academic
discussion, let us say that indeed complainant
Boaquina was targeted for termination due to union
activities. Under the circumstances, she would have
just been terminated outright, without recall. The truth of
the matter is, Boaquina was made to go on leave in
September 1992 precisely because of the pull-out of
CP Clare Theta-J which resulted in work shortage. If
she was recalled before she was finally retrenched, it
only shows that the company had been trying its best to
accommodate the most possible number of employees
in its payroll, even given that it was in dire financial
straits. Of course, the company cannot just let the
workers go to work and pay them their dues even
though there is nothing to do.
Complainant Gayola on the other hand was separated
from service owing to the fact that production totally
ceased by virtue of the blockade caused by the strike
and the pull-out of Asionics' last customer. In short, the
strike aggravated a bad situation by making it worse
and eventually, the worst possible nightmare for any
business enterprise. There being no work whatsoever
to do, complainant Gayola, like the other employees,
had to be terminated from work. 13 (emphasis portions
found in the text)

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 latter's 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 this 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,

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CORPORATION LAW | 89

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 deduced from the
Court's pronouncement in Sunio vs. National Labor
Relations Commission (127 SCRA 390), 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
Director's 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 (1/2) 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 personally answerable
for the payment of private
respondents' back salaries.
The Court, to be sure, did appear to have deviated
somewhat in Gudez vs. NLRC (183 SCRA 644),
however, it should be clear from our recent
pronouncement in
Mam Realty Development
Corporation and Manuel Centeno vs. NLRC (244 SCRA
797), that the Sunio doctrine still prevails. 15
Nothing on record is shown to indicate that Frank Yih has acted in
bad faith or with malice in carrying out the retrenchment program
of the company. His having been held by the NLRC to be
solidarily and personally liable with API is thus legally unjustified.

WHEREFORE, the questioned decision of the NLRC is

MODIFIED insofar as it holds herein petitioner Frank Yih
personally liable with Asionics Philippines, Inc., which portion of
the decision is SET ASIDE; in all other respects, however, the
questioned decision is AFFIRMED and remains unaffected. No
costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-18216

October 30, 1962

STOCKHOLDERS OF F. GUANZON AND SONS, INC.,

petitioners-appellants,
vs.
REGISTER OF DEEDS OF MANILA, respondent-appellee.
SYLLABUS

1. CORPORATIONS; LIQUIDATION AND DISTRIBUTION OF

ASSETS FOR TRANSFER TO STOCKHOLDERS; CERTIFICATE
OF LIQUIDATION IN THE NATURE OF TRANSFER OR
CONVEYANCE. Where the purpose of the liquidation, as well
as the distribution of the assets of the corporation, is to transfer
their title from the corporation to the stockholders in proportion to
their shareholdings, that transfer cannot be affected without the
corresponding deed of conveyance from the corporation to the
stockholders, and the certificate should be considered as one in
the nature of a transfer or conveyance.
BAUTISTA ANGELO, J.:
On September 19, 1960, the five stockholders of the F. Guanzon
and Sons, Inc. executed a certificate of liquidation of the assets of
the corporation reciting, among other things, that by virtue of a
resolution of the stockholders adopted on September 17, 1960,
dissolving the corporation, they have distributed among
themselves in proportion to their shareholdings, as liquidating
dividends, the assets of said corporation, including real properties
located in Manila.
The certificate of liquidation, when presented to the Register of
Deeds of Manila, was denied registration on seven grounds, of
which the following were disputed by the stockholders:
3. The number of parcels not certified to in the
acknowledgment;

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CORPORATION LAW | 90

5. P430.50 Reg. fees need be paid;

6. P940.45 documentary stamps need be attached to
the document;
7. The judgment of the Court approving the dissolution
and directing the disposition of the assets of the
corporation need be presented (Rules of Court, Rule
104, Sec. 3).
Deciding the consulta elevated by the stockholders, the
Commissioner of Land Registration overruled ground No. 7 and
sustained requirements Nos. 3, 5 and 6.

partition of community property, but rather a transfer or

conveyance of the title of its assets to the individual stockholders.
Indeed, since the purpose of the liquidation, as well as the
distribution of the assets of the corporation, is to transfer their title
from the corporation to the stockholders in proportion to their
shareholdings, and this is in effect the purpose which they
seek to obtain from the Register of Deeds of Manila, that
transfer cannot be effected without the corresponding deed of
conveyance from the corporation to the stockholders. It is,
therefore, fair and logical to consider the certificate of liquidation
as one in the nature of a transfer or conveyance.
WHEREFORE, we affirm the resolution appealed from, with costs
against appellants.

The stockholders interposed the present appeal.

Republic of the Philippines
SUPREME COURT
Manila

As correctly stated by the Commissioner of Land Registration, the

propriety or impropriety of the three grounds on which the denial
of the registration of the certificate of liquidation was predicated
hinges on whether or not that certificate merely involves a
distribution of the corporation's assets or should be considered a
transfer or conveyance.
Appellants contend that the certificate of liquidation is not a
conveyance or transfer but merely a distribution of the assets of
the corporation which has ceased to exist for having been
dissolved. This is apparent in the minutes for dissolution attached
to the document. Not being a conveyance the certificate need not
contain a statement of the number of parcel of land involved in the
distribution in the acknowledgment appearing therein. Hence the
amount of documentary stamps to be affixed thereon should only
be P0.30 and not P940.45, as required by the register of deeds.
Neither is it correct to require appellants to pay the amount of
P430.50 as registration fee.
The Commissioner of Land Registration, however, entertained a
different opinion. He concurred in the view expressed by the
register of deed to the effect that the certificate of liquidation in
question, though it involves a distribution of the corporation's
assets, in the last analysis represents a transfer of said assets
from the corporation to the stockholders. Hence, in substance it is
a transfer or conveyance.
We agree with the opinion of these two officials. A corporation is a
juridical person distinct from the members composing it.
Properties registered in the name of the corporation are owned by
it as an entity separate and distinct from its members. While
shares of stock constitute personal property they do not represent
property of the corporation. The corporation has property of its
own which consists chiefly of real estate (Nelson v. Owen, 113
Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W.
743). A share of stock only typifies an aliquot part of the
corporation's property, or the right to share in its proceeds to that
extent when distributed according to law and equity (Hall & Faley
v. Alabama Terminal, 173 Ala 398, 56 So., 235), but its holder is
not the owner of any part of the capital of the corporation (Bradley
v. Bauder 36 Ohio St., 28). Nor is he entitled to the possession of
any definite portion of its property or assets (Gottfried v. Miller,
104 U.S., 521; Jones v. Davis, 35 Ohio St., 474). The stockholder
is not a co-owner or tenant in common of the corporate property
(Halton v. Hohnston, 166 Ala 317, 51 So 992).
On the basis of the foregoing authorities, it is clear that the act of
liquidation made by the stockholders of the F. Guanzon and Sons,
Inc. of the latter's assets is not and cannot be considered a

EN BANC
G.R. No. L-42780

January 17, 1936

MANILA GAS CORPORATION, plaintiff-appellant,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendantappellee.
SYLLABUS
1. CONSTITUTIONAL LAW; CONSTITUTIONALITY OF
STATUTE; TIME OF RAISING QUESTION. Where neither in
the pleadings, the decision of the trial court, nor the assignment of
errors, was the question of the validity of an act raised, and no
jurisdictional issue being involved, it is not the duty of the
Supreme Court to pass on the constitutional question.
2. ID.; ID.; ID.; ACT No. 3761. VALIDITY. Qure as to whether
or not Act No. 3761 is valid.
3. ID.; TAXATION; OBLIGATION OF CONTRACTS. A
corporation has a personality distinct from that of its stockholders,
enabling the taxing power to reach the latter when they receive
dividends from the corporation. Dividends of a domestic
corporation which are paid and delivered in cash to foreign
corporations as stockholders are subject to the payment of the
income tax, the exemption clause in the charter of the corporation
notwithstanding. (Philippine Telephone and Telegraph Co. v.
Collector of Internal Revenue [1933], 58 Phil., 639.)
4. ID.; ID.; DUE PROCESS OF LAW; SITUS. No state may tax
anything not within its jurisdiction without violating the due
process clause of the constitution. The taxing power of a state
does not extend beyond its territorial limits, but within such limits it
may tax persons, property, income, or business.
5. ID.; ID.; ID.; ID.; If an interest in property is taxed, the situs
of either the property or interest must be found within the state. If
an income is taxed, the recipient thereof must have a domicile
within the state or the property or business out of which the
income issues must be situated within the state so that the
income may be said to have a situs therein.
6. ID.; ID.; ID.; ID. Personal property may be separated from its

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CORPORATION LAW | 91

owner, and he may be taxed on its account at the place where the
property is although it is not the place of his own domicile and
even though he is not a citizen or resident of the state which
imposes the tax. But debts owing by corporations are obligations
of the debtors, and only possess value in the hands of the
creditors.
7. ID.; ID.; ID.; ID.; CASE AT BAR. Held: That the Collector of
Internal Revenue was justified in withholding income taxes on
dividends and interest on bonds and other indebtedness paid by a
resident corporation to non-resident corporations.

MALCOLM, J.:
This is an action brought by the Manila Gas Corporation against
the Collector of Internal Revenue for the recovery of P56,757.37,
which the plaintiff was required by the defendant to deduct and
withhold from the various sums paid it to foreign corporations as
dividends and interest on bonds and other indebtedness and
which the plaintiff paid under protest. On the trial court dismissing
the complaint, with costs, the plaintiff appealed assigning as the
principal errors alleged to have been committed the following:
1. The trial court erred in holding that the dividends paid
by the plaintiff corporation were subject to income tax in
the hands of its stockholders, because to impose the
tax thereon would be to impose a tax on the plaintiff, in
violation of the terms of its franchise, and would,
moreover, be oppressive and inequitable.
2. The trial court erred in not holding that the interest on
bonds and other indebtedness of the plaintiff
corporation, paid by it outside of the Philippine Islands
to corporations not residing therein, were not, on the
part of the recipients thereof, income from Philippine
sources, and hence not subject to Philippine income
tax.
The facts, as stated by the appellant and as accepted by the
appellee, may be summarized as follows: The plaintiff is a
corporation organized under the laws of the Philippine Islands. It
operates a gas plant in the City of Manila and furnishes gas
service to the people of the metropolis and surrounding
municipalities by virtue of a franchise granted to it by the
Philippine Government. Associated with the plaintiff are the
Islands Gas and Electric Company domiciled in New York, United
States, and the General Finance Company domiciled in Zurich,
Switzerland. Neither of these last mentioned corporations is
resident in the Philippines.
For the years 1930, 1931, and 1932, dividends in the sum of
P1,348,847.50 were paid by the plaintiff to the Islands Gas and
Electric Company in the capacity of stockholders upon which
withholding income taxes were paid to the defendant totalling
P40,460.03 For the same years interest on bonds in the sum of
P411,600 was paid by the plaintiff to the Islands Gas and Electric
Company upon which withholding income taxes were paid to the
defendant totalling P12,348. Finally for the stated time period,
interest on other indebtedness in the sum of P131,644,90 was
paid by the plaintiff to the Islands Gas and Electric Company and
the General Finance Company respectively upon which
withholding income taxes were paid to the defendant totalling
P3,949.34.

Some uncertainty existing regarding the place of payment, we will

not go into this factor of the case at this point, except to remark
that the bonds and other tokens of indebtedness are not to be
found in the record. However, Exhibits E, F, and G, certified
correct by the Treasurer of the Manila Gas Corporation, purport to
prove that the place of payment was the United States and
Switzerland.
The appeal naturally divides into two subjects, one covered by the
first assigned error, and the other by the second assigned error.
We shall discuss these subjects and errors in order.
1. Appellant first contends that the dividends paid by it
to its stockholders, the Islands Gas and Electric
Company , were not subject to tax because to impose a
tax thereon would be to do so on the plaintiff
corporation, in violation of the terms of its franchise and
would, moreover, be oppressive and inequitable. This
argument is predicated on the constitutional provision
that no law impairing the obligation of contracts shall be
enacted. The particular portion of the franchise which is
invoked provides:
The grantee shall annually on the fifth day of
January of each year pay to the City of
Manila and the municipalities in the Province
of Rizal in which gas is sold, two and one half
per centum of the gross receipts within said
city and municipalities, respectively, during
the preceding year. Said payment shall be in
lieu of all taxes, Insular, provincial and
municipal, except taxes on the real estate,
buildings, plant, machinery, and other
personal property belonging to the grantee.
The trial judge was of the opinion that the instant case
was governed by our previous decision in the case of
Philippine Telephone and Telegraph Co., vs. Collector
of Internal Revenue ([1933], 58 Phil. 639). In this view
we concur. It is true that the tax exemption provision
relating to the Manila Gas Corporation hereinbefore
quoted differs in phraseology from the tax exemption
provision to be found in the franchise of the Telephone
and Telegraph Company, but the ratio decidendi of the
two cases is substantially the same. As there held and
as now confirmed, a corporation has a personality
distinct from that of its stockholders, enabling the taxing
power to reach the latter when they receive dividends
from the corporation. It must be considered as settled in
this jurisdiction that dividends of a domestic
corporation, which are paid and delivered in cash to
foreign corporations as stockholders, are subject to the
payment in the income tax, the exemption clause in the
charter of the corporation notwithstanding.
For the foreign reasons, we are led to sustain the
decision of the trial court and to overrule appellant's first
assigned error.
2. In support of its second assignment of error,
appellant contends that, as the Islands Gas and Electric
Company and the General Finance Company are
domiciled in the United States and Switzerland
respectively, and as the interest on the bonds and other
indebtedness earned by said corporations has been
paid in their respective domiciles, this is not income
from Philippine sources within the meaning of the

VOLENTI NON FIT INJURIA

CORPORATION LAW | 92

Philippine Income Tax Law. Citing sections 10 (a) and

13 (e) of Act No. 2833, the Income Tax Law, appellant
asserts that their applicability has been squarely
determined by decisions of this court in the cases of
Manila Railroad Co. vs. Collector of Internal Revenue
(No. 31196, promulgated December 2, 1929, nor
reported), and Philippine Railway Co. vs. Posadas (No.
38766, promulgated October 30, 1933 [58 Phil., 968])
wherein it was held that interest paid to non-resident
individuals or corporations is not income from Philippine
sources, and hence not subject to the Philippine
Income Tax. The Solicitor-General answers with the
observation that the cited decisions interpreted the
Income Tax Law before it was amended by Act No.
3761 to cover the interest on bonds and other
obligations or securities paid "within or without the
Philippine Islands." Appellant rebuts this argument by
"assuming, for the sake of the argument, that by the
amendment introduced to section 13 of Act No. 2833 by
Act No. 3761 the Legislature intended the interest from
Philippine sources and so is subject to tax," but with the
necessary sequel that the amendatory statute is invalid
and unconstitutional as being the power of the
Legislature to enact.
Taking first under observation that last point, it is to be observed
that neither in the pleadings, the decision of the trial court, nor the
assignment of errors, was the question of the validity of Act No.
3761 raised. Under such circumstances, and no jurisdictional
issue being involved, we do not feel that it is the duty of the court
to pass on the constitutional question, and accordingly will refrain
from doing so. (Cadwaller-Gibson Lumber Co. vs. Del Rosario
[1913], 26 Phil., 192; Macondray and Co. vs. Benito and Ocampo,
P. 137, ante; State vs. Burke [1912], 175 Ala., 561.)
As to the applicability of the local cases cited and of the Porto
Rican case of Domenech vs. United Porto Rican Sugar co.
([1932], 62 F. [2d], 552), we need only observe that these cases
announced good law, but that each he must be decided on its
particular facts. In other words, in the opinion of the majority of the
court, the facts at bar and the facts in those cases can be clearly
differentiated. Also, in the case at bar there is some uncertainty
concerning the place of payment, which under one view could be
considered the Philippines and under another view the United
States and Switzerland, but which cannot be definitely determined
without the necessary documentary evidence before, us.

These views concerning situs for taxation purposes apply as well

to an organized, unincorporated territory or to a Commonwealth
having the status of the Philippines.
Pushing to one side that portion of Act No. 3761 which permits
taxation of interest on bonds and other indebtedness paid without
the Philippine Islands, the question is if the income was derived
from sources within the Philippine Islands.
In the judgment of the majority of the court, the question should
be answered in the affirmative. The Manila Gas Corporation
operates its business entirely within the Philippines. Its earnings,
therefore come from local sources. The place of material delivery
of the interest to the foreign corporations paid out of the revenue
of the domestic corporation is of no particular moment. The place
of payment even if conceded to be outside of tho country cannot
alter the fact that the income was derived from the Philippines.
The word "source" conveys only one idea, that of origin, and the
origin of the income was the Philippines.
In synthesis, therefore, we hold that conditions have not been
provided which justify the court in passing on the constitutional
question suggested; that the facts while somewhat obscure differ
from the facts to be found in the cases relied upon, and that the
Collector of Internal Revenue was justified in withholding income
taxes on interest on bonds and other indebtedness paid to nonresident corporations because this income was received from
sources within the Philippine Islands as authorized by the Income
Tax Law. For the foregoing reasons, the second assigned error
will be overruled.
Before concluding, it is but fair to state that the writer's opinion on
the first subject and the first assigned error herein discussed is
accurately set forth, but that his opinion on the second subject
and the second assigned error is not accurately reflected,
because on this last division his views coincide with those of the
appellant. However, in the interest of the prompt disposition of this
case, the decision has been written up in accordance with
instructions received from the court.
Judgment affirmed, with the cost of this instance assessed
against the appellant.
Hull, Vickers, Imperial, Butte, and Recto, JJ., concur.

The approved doctrine is that no state may tax anything not within
its jurisdiction without violating the due process clause of the
constitution. The taxing power of a state does not extend beyond
its territorial limits, but within such it may tax persons, property,
income, or business. If an interest in property is taxed, the situs of
either the property or interest must be found within the state. If an
income is taxed, the recipient thereof must have a domicile within
the state or the property or business out of which the income
issues must be situated within the state so that the income may
be said to have a situs therein. Personal property may be
separated from its owner, and he may be taxed on its account at
the place where the property is although it is not the place of his
own domicile and even though he is not a citizen or resident of
the state which imposes the tax. But debts owing by corporations
are obligations of the debtors, and only possess value in the
hands of the creditors. (Farmers Loan Co. vs. Minnesota [1930],
280 U.S., 204; Union Refrigerator Transit Co. vs. Kentucky [1905],
199 U.S., 194 State Tax on Foreign held Bonds [1873, 15 Wall.,
300; Bick vs. Beach [1907], 206 U. S., 392; State ex rel.
Manitowoc Gas Co. vs. Wig. Tax Comm. [1915], 161 Wis., 111;
United States Revenue Act of 1932, sec. 143.)

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Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
Adm. Matter No. R-181-P

July 31, 1987

ADELIO C. CRUZ, complainant,

vs.
QUITERIO L. DALISAY, Deputy Sheriff, RTC, Manila,
respondents.
RESOLUTION

FERNAN, J.:
In a sworn complaint dated July 23, 1984, Adelio C. Cruz charged
Quiterio L. Dalisay, Senior Deputy Sheriff of Manila, with
"malfeasance in office, corrupt practices and serious irregularities"
allegedly committed as follows:
1. Respondent sheriff attached and/or levied the money belonging
to complainant Cruz when he was not himself the judgment
debtor in the final judgment of NLRC NCR Case No. 8-12389-91
sought to be enforced but rather the company known as
"Qualitrans Limousine Service, Inc.," a duly registered
corporation; and,
2. Respondent likewise caused the service of the alias writ of
execution upon complainant who is a resident of Pasay City,
despite knowledge that his territorial jurisdiction covers Manila
only and does not extend to Pasay City.
In his Comments, respondent Dalisay explained that when he
garnished complainant's cash deposit at the Philtrust bank, he
was merely performing a ministerial duty. While it is true that said
writ was addressed to Qualitrans Limousine Service, Inc., yet it is
also a fact that complainant had executed an affidavit before the
Pasay City assistant fiscal stating that he is the owner/president
of said corporation and, because of that declaration, the counsel
for the plaintiff in the labor case advised him to serve notice of
garnishment on the Philtrust bank.
On November 12, 1984, this case was referred to the Executive
Judge of the Regional Trial Court of Manila for investigation,
report and recommendation.

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CORPORATION LAW | 94

Prior to the termination of the proceedings, however, complainant

executed an affidavit of desistance stating that he is no longer
interested in prosecuting the case against respondent Dalisay and
that it was just a "misunderstanding" between them. Upon
respondent's motion, the Executive Judge issued an order dated
May 29, 1986 recommending the dismissal of the case.
It has been held that the desistance of complainant does not
preclude the taking of disciplinary action against respondent.
Neither does it dissuade the Court from imposing the appropriate
corrective sanction. One who holds a public position, especially
an office directly connected with the administration of justice and
the execution of judgments, must at all times be free from the
appearance of impropriety.1
We hold that respondent's actuation in enforcing a judgment
against complainant who is not the judgment debtor in the case
calls for disciplinary action. Considering the ministerial nature of
his duty in enforcing writs of execution, what is incumbent upon
him is to ensure that only that portion of a decision ordained or
decreed in the dispositive part should be the subject of
execution.2 No more, no less. That the title of the case specifically
names complainant as one of the respondents is of no moment
as execution must conform to that directed in the dispositive
portion and not in the title of the case.
The tenor of the NLRC judgment and the implementing writ is
clear enough. It directed Qualitrans Limousine Service, Inc. to
reinstate the discharged employees and pay them full backwages.
Respondent, however, chose to "pierce the veil of corporate
entity" usurping a power belonging to the court and assumed
improvidently that since the complainant is the owner/president of
Qualitrans Limousine Service, Inc., they are one and the same. It
is a well-settled doctrine both in law and in equity that as a legal
entity, a corporation has a personality distinct and separate from
its individual stockholders or members. The mere fact that one is
president of a corporation does not render the property he owns
or possesses the property of the corporation, since the president,
as individual, and the corporation are separate entities.3
Anent the charge that respondent exceeded his territorial
jurisdiction, suffice it to say that the writ of execution sought to be
implemented was dated July 9, 1984, or prior to the issuance of
Administrative Circular No. 12 which restrains a sheriff from
enforcing a court writ outside his territorial jurisdiction without first
notifying in writing and seeking the assistance of the sheriff of the
place where execution shall take place.
ACCORDINGLY, we find Respondent Deputy Sheriff Quiterio L.
Dalisay NEGLIGENT in the enforcement of the writ of execution in
NLRC Case-No. 8-12389-91, and a fine equivalent to three [3]
months salary is hereby imposed with a stern warning that the
commission of the same or similar offense in the future will merit a
heavier penalty. Let a copy of this Resolution be filed in the
personal record of the respondent.
SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Cortes, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-31061 August 17, 1976
SULO NG BAYAN INC., plaintiff-appellant,
vs.
GREGORIO ARANETA, INC., PARADISE FARMS, INC.,
NATIONAL WATERWORKS & SEWERAGE AUTHORITY,
HACIENDA CARETAS, INC, and REGISTER OF DEEDS OF
BULACAN, defendants-appellees.
ANTONIO, J.:
The issue posed in this appeal is whether or not plaintiff
corporation (non- stock may institute an action in behalf of its
individual members for the recovery of certain parcels of land
allegedly owned by said members; for the nullification of the
transfer certificates of title issued in favor of defendants appellees
covering the aforesaid parcels of land; for a declaration of
"plaintiff's members as absolute owners of the property" and the
issuance of the corresponding certificate of title; and for damages.
On April 26, 1966, plaintiff-appellant Sulo ng Bayan, Inc. filed an
accion de revindicacion with the Court of First Instance of
Bulacan, Fifth Judicial District, Valenzuela, Bulacan, against
defendants-appellees to recover the ownership and possession of
a large tract of land in San Jose del Monte, Bulacan, containing
an area of 27,982,250 square meters, more or less, registered
under the Torrens System in the name of defendants-appellees'
predecessors-in-interest. 1 The complaint, as amended on June
13, 1966, specifically alleged that plaintiff is a corporation
organized and existing under the laws of the Philippines, with its
principal office and place of business at San Jose del Monte,
Bulacan; that its membership is composed of natural persons
residing at San Jose del Monte, Bulacan; that the members of the
plaintiff corporation, through themselves and their predecessorsin-interest, had pioneered in the clearing of the fore-mentioned
tract of land, cultivated the same since the Spanish regime and
continuously possessed the said property openly and public under
concept of ownership adverse against the whole world; that
defendant-appellee Gregorio Araneta, Inc., sometime in the year
1958, through force and intimidation, ejected the members of the
plaintiff corporation fro their possession of the aforementioned
vast tract of land; that upon investigation conducted by the
members and officers of plaintiff corporation, they found out for
the first time in the year 1961 that the land in question "had been
either fraudelently or erroneously included, by direct or
constructive fraud, in Original Certificate of Title No. 466 of the
Land of Records of the province of Bulacan", issued on May 11,
1916, which title is fictitious, non-existent and devoid of legal

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CORPORATION LAW | 95

efficacy due to the fact that "no original survey nor plan
whatsoever" appears to have been submitted as a basis thereof
and that the Court of First Instance of Bulacan which issued the
decree of registration did not acquire jurisdiction over the land
registration case because no notice of such proceeding was given
to the members of the plaintiff corporation who were then in actual
possession of said properties; that as a consequence of the nullity
of the original title, all subsequent titles derived therefrom, such
as Transfer Certificate of Title No. 4903 issued in favor of
Gregorio Araneta and Carmen Zaragoza, which was subsequently
cancelled by Transfer Certificate of Title No. 7573 in the name of
Gregorio Araneta, Inc., Transfer Certificate of Title No. 4988
issued in the name of, the National Waterworks & Sewerage
Authority (NWSA), Transfer Certificate of Title No. 4986 issued in
the name of Hacienda Caretas, Inc., and another transfer
certificate of title in the name of Paradise Farms, Inc., are
therefore void. Plaintiff-appellant consequently prayed (1) that
Original Certificate of Title No. 466, as well as all transfer
certificates of title issued and derived therefrom, be nullified; (2)
that "plaintiff's members" be declared as absolute owners in
common of said property and that the corresponding certificate of
title be issued to plaintiff; and (3) that defendant-appellee
Gregorio Araneta, Inc. be ordered to pay to plaintiff the damages
therein specified.
On September 2, 1966, defendant-appellee Gregorio Araneta,
Inc. filed a motion to dismiss the amended complaint on the
grounds that (1) the complaint states no cause of action; and (2)
the cause of action, if any, is barred by prescription and laches.
Paradise Farms, Inc. and Hacienda Caretas, Inc. filed motions to
dismiss based on the same grounds. Appellee National
Waterworks & Sewerage Authority did not file any motion to
dismiss. However, it pleaded in its answer as special and
affirmative defenses lack of cause of action by the plaintiffappellant and the barring of such action by prescription and
laches.
During the pendency of the motion to dismiss, plaintiff-appellant
filed a motion, dated October 7, 1966, praying that the case be
transferred to another branch of the Court of First Instance sitting
at Malolos, Bulacan, According to defendants-appellees, they
were not furnished a copy of said motion, hence, on October 14,
1966, the lower court issued an Order requiring plaintiff-appellant
to furnish the appellees copy of said motion, hence, on October
14, 1966, defendant-appellant's motion dated October 7, 1966
and, consequently, prayed that the said motion be denied for lack
of notice and for failure of the plaintiff-appellant to comply with the
Order of October 14, 1966. Similarly, defendant-appellee paradise
Farms, Inc. filed, on December 2, 1966, a manifestation
information the court that it also did not receive a copy of the
afore-mentioned of appellant. On January 24, 1967, the trial court
issued an Order dismissing the amended complaint.
On February 14, 1967, appellant filed a motion to reconsider the
Order of dismissal on the grounds that the court had no
jurisdiction to issue the Order of dismissal, because its request for
the transfer of the case from the Valenzuela Branch of the Court
of First Instance to the Malolos Branch of the said court has been
approved by the Department of Justice; that the complaint states
a sufficient cause of action because the subject matter of the
controversy in one of common interest to the members of the
corporation who are so numerous that the present complaint
should be treated as a class suit; and that the action is not barred
by the statute of limitations because (a) an action for the
reconveyance of property registered through fraud does not
prescribe, and (b) an action to impugn a void judgment may be
brought any time. This motion was denied by the trial court in its
Order dated February 22, 1967. From the afore-mentioned Order

of dismissal and the Order denying its motion for reconsideration,

plaintiff-appellant appealed to the Court of Appeals.
On September 3, 1969, the Court of Appeals, upon finding that no
question of fact was involved in the appeal but only questions of
law and jurisdiction, certified this case to this Court for resolution
of the legal issues involved in the controversy.
I
Appellant contends, as a first assignment of error, that the trial
court acted without authority and jurisdiction in dismissing the
amended complaint when the Secretary of Justice had already
approved the transfer of the case to any one of the two branches
of the Court of First Instance of Malolos, Bulacan.
Appellant confuses the jurisdiction of a court and the venue of
cases with the assignment of cases in the different branches of
the same Court of First Instance. Jurisdiction implies the power of
the court to decide a case, while venue the place of action. There
is no question that respondent court has jurisdiction over the
case. The venue of actions in the Court of First Instance is
prescribed in Section 2, Rule 4 of the Revised Rules of Court. The
laying of venue is not left to the caprice of plaintiff, but must be in
accordance with the aforesaid provision of the rules. 2 The mere
fact that a request for the transfer of a case to another branch of
the same court has been approved by the Secretary of Justice
does not divest the court originally taking cognizance thereof of its
jurisdiction, much less does it change the venue of the action. As
correctly observed by the trial court, the indorsement of the
Undersecretary of Justice did not order the transfer of the case to
the Malolos Branch of the Bulacan Court of First Instance, but
only "authorized" it for the reason given by plaintiff's counsel that
the transfer would be convenient for the parties. The trial court is
not without power to either grant or deny the motion, especially in
the light of a strong opposition thereto filed by the defendant. We
hold that the court a quo acted within its authority in denying the
motion for the transfer the case to Malolos notwithstanding the
authorization" of the same by the Secretary of Justice.
II
Let us now consider the substantive aspect of the Order of
dismissal.
In dismissing the amended complaint, the court a quo said:
The issue of lack of cause of action raised in
the motions to dismiss refer to the lack of
personality of plaintiff to file the instant action.
Essentially, the term 'cause of action' is
composed of two elements: (1) the right of
the plaintiff and (2) the violation of such right
by the defendant. (Moran, Vol. 1, p. 111). For
these reasons, the rules require that every
action must be prosecuted and defended in
the name of the real party in interest and that
all persons having an interest in the subject
of the action and in obtaining the relief
demanded shall be joined as plaintiffs (Sec.
2, Rule 3). In the amended complaint, the
people whose rights were alleged to have
been violated by being deprived and
dispossessed of their land are the members
of the corporation and not the corporation
itself. The corporation has a separate. and

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CORPORATION LAW | 96

distinct personality from its members, and

this is not a mere technicality but a matter of
substantive law. There is no allegation that
the members have assigned their rights to
the corporation or any showing that the
corporation has in any way or manner
succeeded to such rights. The corporation
evidently did not have any rights violated by
the defendants for which it could seek
redress. Even if the Court should find against
the defendants, therefore, the plaintiff
corporation would not be entitled to the reliefs
prayed for, which are recoveries of ownership
and possession of the land, issuance of the
corresponding title in its name, and payment
of damages. Neither can such reliefs be
awarded to the members allegedly deprived
of their land, since they are not parties to the
suit. It appearing clearly that the action has
not been filed in the names of the real parties
in interest, the complaint must be dismissed
on the ground of lack of cause of action. 3
Viewed in the light of existing law and jurisprudence, We find that
the trial court correctly dismissed the amended complaint.
It is a doctrine well-established and obtains both at law and in
equity that a corporation is a distinct legal entity to be considered
as separate and apart from the individual stockholders or
members who compose it, and is not affected by the personal
rights, obligations and transactions of its stockholders or
members. 4 The property of the corporation is its property and not
that of the stockholders, as owners, although they have equities in
it. Properties registered in the name of the corporation are owned
by it as an entity separate and distinct from its members. 5
Conversely, a corporation ordinarily has no interest in the
individual property of its stockholders unless transferred to the
corporation, "even in the case of a one-man corporation. 6 The
mere fact that one is president of a corporation does not render
the property which he owns or possesses the property of the
corporation, since the president, as individual, and the corporation
are separate similarities. 7 Similarly, stockholders in a corporation
engaged in buying and dealing in real estate whose certificates of
stock entitled the holder thereof to an allotment in the distribution
of the land of the corporation upon surrender of their stock
certificates were considered not to have such legal or equitable
title or interest in the land, as would support a suit for title,
especially against parties other than the corporation. 8
It must be noted, however, that the juridical personality of the
corporation, as separate and distinct from the persons composing
it, is but a legal fiction introduced for the purpose of convenience
and to subserve the ends of justice. 9 This separate personality of
the corporation may be disregarded, or the veil of corporate fiction
pierced, in cases where it is used as a cloak or cover for fraud or
illegality, or to work -an injustice, or where necessary to achieve
equity. 10
Thus, when "the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, ... the
law will regard the corporation as an association of persons, or in
the case of two corporations, merge them into one, the one being
merely regarded as part or instrumentality of the other. 11 The
same is true where a corporation is a dummy and serves no
business purpose and is intended only as a blind, or an alter ego
or business conduit for the sole benefit of the stockholders. 12 This
doctrine of disregarding the distinct personality of the corporation
has been applied by the courts in those cases when the corporate

entity is used for the evasion of taxes 13 or when the veil of

corporate fiction is used to confuse legitimate issue of employeremployee relationship, 14 or when necessary for the protection of
creditors, in which case the veil of corporate fiction may be
pierced and the funds of the corporation may be garnished to
satisfy the debts of a principal stockholder. 15 The aforecited
principle is resorted to by the courts as a measure protection for
third parties to prevent fraud, illegality or injustice. 16
It has not been claimed that the members have assigned or
transferred whatever rights they may have on the land in question
to the plaintiff corporation. Absent any showing of interest,
therefore, a corporation, like plaintiff-appellant herein, has no
personality to bring an action for and in behalf of its stockholders
or members for the purpose of recovering property which belongs
to said stockholders or members in their personal capacities.
It is fundamental that there cannot be a cause of action 'without
an antecedent primary legal right conferred' by law upon a
person. 17 Evidently, there can be no wrong without a
corresponding right, and no breach of duty by one person without
a corresponding right belonging to some other person. 18 Thus,
the essential elements of a cause of action are legal right of the
plaintiff, correlative obligation of the defendant, an act or omission
of the defendant in violation of the aforesaid legal right. 19 Clearly,
no right of action exists in favor of plaintiff corporation, for as
shown heretofore it does not have any interest in the subject
matter of the case which is material and, direct so as to entitle it to
file the suit as a real party in interest.
III
Appellant maintains, however, that the amended complaint may
be treated as a class suit, pursuant to Section 12 of Rule 3 of the
Revised Rules of Court.
In order that a class suit may prosper, the following requisites
must be present: (1) that the subject matter of the controversy is
one of common or general interest to many persons; and (2) that
the parties are so numerous that it is impracticable to bring them
all before the court. 20
Under the first requisite, the person who sues must have an
interest in the controversy, common with those for whom he sues,
and there must be that unity of interest between him and all such
other persons which would entitle them to maintain the action if
suit was brought by them jointly. 21
As to what constitutes common interest in the subject matter of
the controversy, it has been explained in Scott v. Donald 22 thus:
The interest that will allow parties to join in a
bill of complaint, or that will enable the court
to dispense with the presence of all the
parties,
when
numerous,
except
a
determinate number, is not only an interest in
the question, but one in common in the
subject Matter of the suit; ... a community of
interest growing out of the nature and
condition of the right in dispute; for, although
there may not be any privity between the
numerous parties, there is a common title out
of which the question arises, and which lies
at the foundation of the proceedings ... [here]
the only matter in common among the
plaintiffs, or between them and the

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CORPORATION LAW | 97

defendants, is an interest in the Question

involved which alone cannot lay a foundation
for the joinder of parties. There is scarcely a
suit at law, or in equity which settles a
Principle or applies a principle to a given
state of facts, or in which a general statute is
interpreted, that does not involved a Question
in which other parties are interested. ...
(Emphasis supplied )
Here, there is only one party plaintiff, and the plaintiff corporation
does not even have an interest in the subject matter of the
controversy, and cannot, therefore, represent its members or
stockholders who claim to own in their individual capacities
ownership of the said property. Moreover, as correctly stated by
the appellees, a class suit does not lie in actions for the recovery
of property where several persons claim Partnership of their
respective portions of the property, as each one could alleged and
prove his respective right in a different way for each portion of the
land, so that they cannot all be held to have Identical title through
acquisition prescription. 23
Having shown that no cause of action in favor of the plaintiff exists
and that the action in the lower court cannot be considered as a
class suit, it would be unnecessary and an Idle exercise for this
Court to resolve the remaining issue of whether or not the
plaintiffs action for reconveyance of real property based upon
constructive or implied trust had already prescribed.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 89561 September 13, 1990
BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO,
VICTORIA M. CASTILLO, BERTILLA C. RADA, MARIETTA C.
ABAEZ, LEOVINA C. JALBUENA and SANTIAGO M.
RIVERA, petitioners,
vs.
COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE
MACHINERY PARTS MANUFACTURING CO., INC.,
respondents.
REGALADO, J.:

ACCORDINGLY, the instant appeal is hereby DISMISSED with

costs against the plaintiff-appellant.
Fernando, C.J., Barredo, Aquino and Concepcion, Jr., JJ., concur.

This is a petition to review the decision of respondent Court of

Appeals, dated August 3, 1989, in CA-GR CV No. 15412, entitled
"Buenaflor M. Castillo Umali, et al. vs. Philippine Machinery Parts
Manufacturing Co., Inc., et al.," 1 the dispositive portion whereof
provides:
WHEREFORE, viewed in the light of the entire record, the
judgment appealed from must be, as it is hereby
REVERSED. In lieu thereof, a judgment is hereby rendered1) Dismissing the complaint, with cost against plaintiffs;
2) Ordering plaintiffs-appellees to vacate the subject
properties; and
3) Ordering plaintiffs-appellees to pay upon defendants'
counterclaims:
a) To defendant-appellant PM Parts: (i) damages
consisting of the value of the fruits in the subject
parcels of land of which they were deprived in the
sum of P26,000.00 and (ii) attorney's fees of
P15,000.00
b) To defendant-appellant Bormaheco: (i)
expenses of litigation in the amount of P5,000.00
and (ii) attorney's fees of P15,000.00.
SO ORDERED.
The original complaint for annulment of title filed in the court a
quo by herein petitioners included as party defendants the
Philippine Machinery Parts Manufacturing Co., Inc. (PM Parts),
Insurance Corporation of the Philippines (ICP), Bormaheco, Inc.,

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CORPORATION LAW | 98

(Bormaheco) and Santiago M. Rivera (Rivera). A Second

Amended Complaint was filed, this time impleading Santiago M.
Rivera as party plaintiff.
During the pre-trial conference, the parties entered into the
following stipulation of facts:
As between all parties: Plaintiff Buenaflor M. Castillo is
the judicial administratrix of the estate of Felipe Castillo
in Special Proceeding No. 4053, pending before Branch
IX, CFI of Quezon (per Exhibit A) which intestate
proceedings was instituted by Mauricia Meer Vda. de
Castillo, the previous administratrix of the said
proceedings prior to 1970 (per exhibits A-1 and A-2)
which case was filed in Court way back in 1964;
b) The four (4) parcels of land described in paragraph 3
of the Complaint were originally covered by TCT No. T42104 and Tax Dec. No. 14134 with assessed value of
P3,100.00; TCT No. T 32227 and Tax Dec. No. 14132,
with assessed value of P5,130,00; TCT No. T-31762
and Tax Dec. No. 14135, with assessed value of
P6,150.00; and TCT No. T-42103 with Tax Dec. No.
14133, with assessed value of P3,580.00 (per Exhibits
A-2 and B, B-1 to B-3 C, C-1 -to C3
c) That the above-enumerated four (4) parcels of land
were the subject of the Deed of Extra-Judicial Partition
executed by the heirs of Felipe Castillo (per Exhibit D)
and by virtue thereof the titles thereto has (sic) been
cancelled and in lieu thereof, new titles in the name of
Mauricia Meer Vda. de Castillo and of her children,
namely: Buenaflor, Bertilla, Victoria, Marietta and
Leovina, all surnamed Castillo has (sic) been issued,
namely: TCT No. T-12113 (Exhibit E ); TCT No. T-13113
(Exhibit F); TCT No. T-13116 (Exhibit G ) and TCT No.
T13117 (Exhibit H )
d) That mentioned parcels of land were submitted as
guaranty in the Agreement of Counter-Guaranty with
Chattel-Real Estate Mortgage executed on 24 October
1970 between Insurance Corporation of the Philippines
and Slobec Realty Corporation represented by
Santiago Rivera (Exhibit 1);
e) That based on the Certificate of Sale issued by the
Sheriff of the Province of Quezon in favor of Insurance
Corporation of the Philippines it was able to transfer to
itself the titles over the lots in question, namely: TCT
No. T-23705 (Exhibit M), TCT No. T 23706 (Exhibit N ),
TCT No. T-23707 (Exhibit 0) and TCT No. T 23708
(Exhibit P);
f) That on 10 April 1975, the Insurance
Corporation of the Philippines sold to PM Parts the
immovables in question (per Exhibit 6 for PM
Parts) and by reason thereof, succeeded in
transferring unto itself the titles over the lots in
dispute, namely: per TCT No. T-24846 (Exhibit
Q ), per TCT No. T-24847 (Exhibit R ), TCT No. T24848 (Exhibit), TCT No. T-24849 (Exhibit T );
g) On 26 August l976, Mauricia Meer Vda. de
Castillo' genther letter to Modesto N. Cervantes
stating that she and her children refused to comply
with his demands (Exhibit V-2);

h) That from at least the months of October,

November and December 1970 and January
1971, Modesto N. Cervantes was the VicePresident of Bormaheco, Inc. later President
thereof, and also he is one of the Board of
Directors of PM Parts; on the other hand, Atty.
Martin M. De Guzman was the legal counsel of
Bormaheco, Inc., later Executive Vice-President
thereof, and who also is the legal counsel of
Insurance Corporation of the Philippines and PM
Parts; that Modesto N. Cervantes served later on
as President of PM Parts, and that Atty. de
Guzman was retained by Insurance Corporation of
the Philippines specifically for foreclosure
purposes only;
i) Defendant Bormaheco, Inc. on
November 25, 1970 sold to Slobec Realty
and Development, Inc., represented by
Santiago Rivera, President, one (1) unit
Caterpillar Tractor D-7 with Serial No.
281114 evidenced by a contract marked
Exhibit J and Exhibit I for Bormaheco, Inc.;
j) That the Surety Bond No. 14010 issued
by co-defendant ICP was likewise secured
by an Agreement with Counter-Guaranty
with Real Estate Mortgage executed by
Slobec Realty & Development, Inc.,
Mauricia Castillo Meer, Buenaflor Castillo,
Bertilla Castillo, Victoria Castillo, Marietta
Castillo
and
Leovina
Castillo,
as
mortgagors in favor of ICP which
document was executed and ratified
before notary public Alberto R. Navoa of
the City of Manila on October 24,1970;
k) That the property mortgaged consisted
of four (4) parcels of land situated in
Lucena City and covered by TCT Nos. T13114,
T13115,
T-13116 and T-13117 of the Register of
Deeds of Lucena City;
l) That the tractor sold by defendant
Bormaheco, Inc. to Slobec Realty &
Development, Inc. was delivered to
Bormaheco, Inc. on or about October
2,1973, by Mr. Menandro Umali for
purposes of repair;
m) That in August 1976, PM Parts notified
Mrs. Mauricia Meer about its ownership
and the assignment of Mr. Petronilo Roque
as caretaker of the subject property;
n) That plaintiff and other heirs are harvest
fruits of the property (daranghita) which is
worth no less than Pl,000.00 per harvest.
As
between
plaintiffs
defendant Bormaheco, Inc

and

o) That on 25 November 1970, at Makati, Rizal,

Same Rivera, in representation of the Slobec
Realty & Development Corporation executed in

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CORPORATION LAW | 99

favor of Bormaheco, Inc., represented by its

Vice-President Modesto N. Cervantes a Chattel
Mortgage concerning one unit model CAT D7
Caterpillar Crawler Tractor as described therein
as security for the payment in favor of the
mortgagee of the amount of P180,000.00 (per
Exhibit K) that Id document was superseded by
another chattel mortgage dated January 23,
1971 (Exhibit 15);
p) On 18 December 1970, at Makati, Rizal, the
Bormaheco, Inc., represented by its VicePresident Modesto Cervantes and Slobec
Realty Corporation represented by Santiago
Rivera executed the sales agreement
concerning the sale of one (1) unit Model CAT
D7 Caterpillar Crawler Tractor as described
therein for the amount of P230,000.00 (per
Exhibit J) which document was superseded by
the Sales Agreement dated January 23,1971
(Exhibit 16);
q) Although it appears on the document entitled
Chattel Mortgage (per Exhibit K) that it was
executed on 25 November 1970, and in the
document entitled Sales Agreement (per Exhibit
J) that it was executed on 18 December 1970, it
appears in the notarial register of the notary
public who notarized them that those two
documents were executed on 11 December
1970. The certified xerox copy of the notarial
register of Notary Public Guillermo Aragones
issued by the Bureau of Records Management
is hereto submitted as Exhibit BB That said
chattel mortgage was superseded by another
document dated January 23, 1971;
r) That on 23 January 1971, Slobec Realty
Development Corporation, represented by
Santiago Rivera, received from Bormaheco,
Inc. one (1) tractor Caterpillar Model D-7
pursuant to Invoice No. 33234 (Exhibits 9 and
9-A, Bormaheco, Inc.) and delivery receipt
No. 10368 (per Exhibits 10 and 10-A for
Bormaheco, Inc
s) That on 28 September 1973, Atty. Martin
M. de Guzman, as counsel of Insurance
Corporation of the Philippines purchased at
public auction for said corporation the four (4)
parcels of land subject of tills case (per
Exhibit L), and which document was
presented to the Register of Deeds on 1
October 1973;
t) Although it appears that the realties in issue
has (sic) been sold by Insurance Corporation
of the Philippines in favor of PM Parts on 1 0
April 1975, Modesto N. Cervantes, formerly
Vice- President and now President of
Bormaheco, Inc., sent his letter dated 9
August 1976 to Mauricia Meer Vda. de
Castillo (Exhibit V), demanding that she and
her children should vacate the premises;
u) That the Caterpillar Crawler Tractor Model
CAT D-7 which was received by Slobec

Realty Development Corporation was actually

reconditioned and repainted. " 2
We cull the following antecedents from the decision of respondent
Court of Appeals:
Plaintiff Santiago Rivera is the nephew of
plaintiff Mauricia Meer Vda. de Castillo. The
Castillo family are the owners of a parcel of
land located in Lucena City which was given
as security for a loan from the Development
Bank of the Philippines. For their failure to
pay the amortization, foreclosure of the said
property was about to be initiated. This
problem was made known to Santiago
Rivera, who proposed to them the conversion
into subdivision of the four (4) parcels of land
adjacent to the mortgaged property to raise
the necessary fund. The Idea was accepted
by the Castillo family and to carry out the
project, a Memorandum of Agreement (Exh.
U p. 127, Record) was executed by and
between Slobec Realty and Development,
Inc., represented by its President Santiago
Rivera and the Castillo family. In this
agreement, Santiago Rivera obliged himself
to pay the Castillo family the sum of
P70,000.00 immediately after the execution
of the agreement and to pay the additional
amount of P400,000.00 after the property has
been converted into a subdivision. Rivera,
armed with the agreement, Exhibit U ,
approached
Mr.
Modesto
Cervantes,
President of defendant Bormaheco, and
proposed to purchase from Bormaheco two
(2) tractors Model D-7 and D-8 Subsequently,
a Sales Agreement was executed on
December 28,1970 (Exh. J, p. 22, Record).
On January 23, 1971, Bormaheco, Inc. and
Slobec Realty and Development, Inc.,
represented by its President, Santiago
Rivera, executed a Sales Agreement over
one unit of Caterpillar Tractor D-7 with Serial
No. 281114, as evidenced by the contract
marked Exhibit '16'. As shown by the
contract, the price was P230,000.00 of which
P50,000.00 was to constitute a down
payment, and the balance of P180,000.00
payable in eighteen monthly installments. On
the same date, Slobec, through Rivera,
executed in favor of Bormaheco a Chattel
Mortgage (Exh. K, p. 29, Record) over the
said equipment as security for the payment of
the aforesaid balance of P180,000.00. As
further security of the aforementioned unpaid
balance, Slobec obtained from Insurance
Corporation of the Phil. a Surety Bond, with
ICP (Insurance Corporation of the Phil.) as
surety and Slobec as principal, in favor of
Bormaheco, as borne out by Exhibit '8' (p.
111, Record). The aforesaid surety bond was
in turn secured by an Agreement of CounterGuaranty with Real Estate Mortgage (Exhibit
I, p. 24, Record) executed by Rivera as
president of Slobec and Mauricia Meer Vda.
de Castillo, Buenaflor Castillo Umali, Bertilla
Castillo-Rada, Victoria Castillo, Marietta

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Castillo and Leovina Castillo Jalbuena, as

mortgagors and Insurance Corporation of the
Philippines (ICP) as mortgagee. In this
agreement, ICP guaranteed the obligation of
Slobec with Bormaheco in the amount of
P180,000.00. In giving the bond, ICP
required that the Castillos mortgage to them
the properties in question, namely, four
parcels of land covered by TCTs in the name
of the aforementioned mortgagors, namely
TCT Nos. 13114, 13115, 13116 and 13117 all
of the Register of Deeds for Lucena City.
On the occasion of the execution on January
23, 1971, of the Sales Agreement Exhibit '16',
Slobec, represented by Rivera received from
Bormaheco the subject matter of the said
Sales
Agreement,
namely,
the
aforementioned tractor Caterpillar Model D-7
as evidenced by Invoice No. 33234 (Exhs. 9
and 9-A, p. 112, Record) and Delivery
Receipt No. 10368 (Exhs. 10 and 10-A, p.
113). This tractor was known by Rivera to be
a
reconditioned
and
repainted
one
[Stipulation of Facts, Pre-trial Order, par. (u)].
Meanwhile, for violation of the terms and
conditions
of
the
Counter-Guaranty
Agreement (Exh. 1), the properties of the
Castillos were foreclosed by ICP As the
highest bidder with a bid of P285,212.00, a
Certificate of Sale was issued by the
Provincial Sheriff of Lucena City and Transfer
Certificates of Title over the subject parcels of
land were issued by the Register of Deeds of
Lucena City in favor of ICP namely, TCT Nos.
T-23705, T 23706, T-23707 and T-23708
(Exhs. M to P, pp. 38-45). The mortgagors
had one (1) year from the date of the
registration of the certificate of sale, that is,
until October 1, 1974, to redeem the property,
but they failed to do so. Consequently, ICP
consolidated its ownership over the subject
parcels of land through the requisite affidavit
of consolidation of ownership dated October
29, 1974, as shown in Exh. '22'(p. 138, Rec.).
Pursuant thereto, a Deed of Sale of Real
Estate covering the subject properties was
issued in favor of ICP (Exh. 23, p. 139, Rec.).
On April 10, 1975, Insurance Corporation of
the Phil. ICP sold to Phil. Machinery Parts
Manufacturing Co. (PM Parts) the four (4)
parcels of land and by virtue of said
conveyance, PM Parts transferred unto itself
the titles over the lots in dispute so that said
parcels of land are now covered by TCT Nos.
T-24846, T-24847, T-24848 and T-24849
(Exhs. Q-T, pp. 46-49, Rec.).
Thereafter, PM Parts, through its President,
Mr. Modesto Cervantes, sent a letter dated
August 9,1976 addressed to plaintiff Mrs.
Mauricia Meer Castillo requesting her and her
children to vacate the subject property, who
(Mrs. Castillo) in turn sent her reply
expressing her refusal to comply with his
demands.

On September 29, 1976, the heirs of the late

Felipe Castillo, particularly plaintiff Buenaflor
M. Castillo Umali as the appointed
administratrix of the properties in question
filed an action for annulment of title before
the then Court of First Instance of Quezon
and docketed thereat as Civil Case No. 8085.
Thereafter, they filed an Amended Complaint
on January 10, 1980 (p. 444, Record). On
July 20, 1983, plaintiffs filed their Second
Amended Complaint, impleading Santiago M.
Rivera as a party plaintiff (p. 706, Record).
They contended that all the aforementioned
transactions starting with the Agreement of
Counter-Guaranty with Real Estate Mortgage
(Exh. I), Certificate of Sale (Exh. L) and the
Deeds of Authority to Sell, Sale and the
Affidavit of Consolidation of Ownership
(Annexes F, G, H, I) as well as the Deed of
Sale (Annexes J, K, L and M) are void for
being entered into in fraud and without the
consent and approval of the Court of First
Instance of Quezon, (Branch IX) before
whom the administration proceedings has
been pending. Plaintiffs pray that the four (4)
parcels of land subject hereof be declared as
owned by the estate of the late Felipe Castillo
and that all Transfer Certificates of Title Nos.
13114,13115,13116,13117, 23705, 23706,
23707, 23708, 24846, 24847, 24848 and
24849 as well as those appearing as
encumbrances at the back of the certificates
of title mentioned be declared as a nullity and
defendants to pay damages and attorney's
fees (pp. 71071 1, Record).
In their amended answer, the defendants
controverted the complaint and alleged, by
way of affirmative and special defenses that
the complaint did not state facts sufficient to
state a cause of action against defendants;
that plaintiffs are not entitled to the reliefs
demanded; that plaintiffs are estopped or
precluded from asserting the matters set forth
in the Complaint; that plaintiffs are guilty of
laches in not asserting their alleged right in
due time; that defendant PM Parts is an
innocent purchaser for value and relied on
the face of the title before it bought the
subject property (p. 744, Record). 3
After trial, the court a quo rendered judgment,
with the following decretal portion:
WHEREFORE, judgment is hereby rendered
in favor of the plaintiffs and against the
defendants,
declaring
the
following
documents:
Agreement of Counter-Guaranty with
Chattel-Real Estate Mortgage dated
October 24,1970 (Exhibit 1);
Sales Agreement dated December 28,
1970 (Exhibit J)

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Chattel Mortgage dated November 25,

1970 (Exhibit K)
Sales Agreement dated January 23,
1971 (Exhibit 16);
Chattel Mortgage dated January 23,
1971 (Exhibit 17);
Certificate of Sale dated September 28,
1973 executed by the Provincial Sheriff
of Quezon in favor of Insurance
Corporation of the Philippines (Exhibit
L);
null and void for being fictitious, spurious and
without consideration. Consequently, Transfer
Certificates of Title Nos. T 23705, T-23706,
T23707 and T-23708 (Exhibits M, N, O and
P) issued in the name of Insurance
Corporation of the Philippines, are likewise
null and void.
The sale by Insurance Corporation of thePhilippines in favor of defendant Philippine
Machinery Parts Manufacturing Co., Inc.,
over Id four (4) parcels of land and Transfer
Certificates of Title Nos. T 24846, T-24847, T24848 and T-24849 subsequently issued by
virtue of said sale in the name of Philippine
Machinery Parts Manufacturing Co., Inc., are
similarly declared null and void, and the
Register of Deeds of Lucena City is hereby
directed to issue, in lieu thereof, transfer
certificates of title in the names of the
plaintiffs, except Santiago Rivera.
Orders the defendants jointly and severally to
pay the plaintiffs moral damages in the sum
of P10,000.00, exemplary damages in the
amount of P5,000.00, and actual litigation
expenses in the sum of P6,500.00.
Defendants are likewise ordered to pay the
plaintiffs, jointly and severally, the sum of
P10,000.00 for and as attomey's fees. With
costs against the defendants.
SO ORDERED. 4
As earlier stated, respondent court reversed the aforequoted
decision of the trial court and rendered the judgment subject of
this petitionPetitioners contend that respondent Court of Appeals erred:
1. In holding and finding that the actions entered into
between petitioner Rivera with Cervantes are all fair and
regular and therefore binding between the parties thereto;
2. In reversing the decision of the lower court, not only based
on erroneous conclusions of facts, erroneous presumptions
not supported by the evidence on record but also, holding
valid and binding the supposed payment by ICP of its

obligation to Bormaheco, despite the fact that the surety

bond issued it had already expired when it opted to foreclose
extrajudically the mortgage executed by the petitioners;
3. In aside the finding of the lower court that there was
necessity to pierce the veil of corporate existence; and
4. In reversing the decision of the lower court of affirming the
same 5
I. Petitioners aver that the transactions entered into between
Santiago M. Rivera, as President of Slobec Realty and
Development Company (Slobec) and Mode Cervantes, as VicePresident of Bormaheco, such as the Sales Agreement, 6 Chattel
Mortgage 7 and the Agreement of Counter-Guaranty with
Chattel/Real Estate Mortgage, 8 are all fraudulent and simulated
and should, therefore, be declared nun and void. Such allegation
is premised primarily on the fact that contrary to the stipulations
agreed upon in the Sales Agreement (Exhibit J), Rivera never
made any advance payment, in the alleged amount of
P50,000.00, to Bormaheco; that the tractor was received by
Rivera only on January 23, 1971 and not in 1970 as stated in the
Chattel Mortgage (Exhibit K); and that when the Agreement of
Counter-Guaranty with Chattel/Real Estate Mortgage was
executed on October 24, 1970, to secure the obligation of ICP
under its surety bond, the Sales Agreement and Chattel Mortgage
had not as yet been executed, aside from the fact that it was
Bormaheco, and not Rivera, which paid the premium for the
surety bond issued by ICP
At the outset, it will be noted that petitioners submission under the
first assigned error hinges purely on questions of fact.
Respondent Court of Appeals made several findings to the effect
that the questioned documents are valid and binding upon the
parties, that there was no fraud employed by private respondents
in the execution thereof, and that, contrary to petitioners'
allegation, the evidence on record reveals that petitioners had
every intention to be bound by their undertakings in the various
transactions had with private respondents. It is a general rule in
this jurisdiction that findings of fact of said appellate court are final
and conclusive and, thus, binding on this Court in the absence of
sufficient and convincing proof, inter alia, that the former acted
with grave abuse of discretion. Under the circumstances, we find
no compelling reason to deviate from this long-standing
jurisprudential pronouncement.
In addition, the alleged failure of Rivera to pay the consideration
agreed upon in the Sales Agreement, which clearly constitutes a
breach of the contract, cannot be availed of by the guilty party to
justify and support an action for the declaration of nullity of the
contract. Equity and fair play dictates that one who commits a
breach of his contract may not seek refuge under the protective
mantle of the law.
The evidence of record, on an overall calibration, does not
convince us of the validity of petitioners' contention that the
contracts entered into by the parties are either absolutely
simulated or downright fraudulent.
There is absolute simulation, which renders the contract null and
void, when the parties do not intend to be bound at all by the
same. 9 The basic characteristic of this type of simulation of
contract is the fact that the apparent contract is not really desired
or intended to either produce legal effects or in any way alter the
juridical situation of the parties. The subsequent act of Rivera in
receiving and making use of the tractor subject matter of the

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CORPORATION LAW | 102

Sales Agreement and Chattel Mortgage, and the simultaneous

issuance of a surety bond in favor of Bormaheco, concomitant
with the execution of the Agreement of Counter-Guaranty with
Chattel/Real Estate Mortgage, conduce to the conclusion that
petitioners had every intention to be bound by these contracts.
The occurrence of these series of transactions between
petitioners and private respondents is a strong indication that the
parties actually intended, or at least expected, to exact fulfillment
of their respective obligations from one another.
Neither will an allegation of fraud prosper in this case where
petitioners failed to show that they were induced to enter into a
contract through the insidious words and machinations of private
respondents without which the former would not have executed
such contract. To set aside a document solemnly executed and
voluntarily delivered, the proof of fraud must be clear and
convincing. 10 We are not persuaded that such quantum of proof
exists in the case at bar.
The fact that it was Bormaheco which paid the premium for the
surety bond issued by ICP does not per se affect the validity of
the bond. Petitioners themselves admit in their present petition
that Rivera executed a Deed of Sale with Right of Repurchase of
his car in favor of Bormaheco and agreed that a part of the
proceeds thereof shall be used to pay the premium for the bond.
11
In effect, Bormaheco accepted the payment of the premium as
an agent of ICP The execution of the deed of sale with a right of
repurchase in favor of Bormaheco under such circumstances
sufficiently establishes the fact that Rivera recognized Bormaheco
as an agent of ICP Such payment to the agent of ICP is,
therefore, binding on Rivera. He is now estopped from
questioning the validity of the suretyship contract.
II. Under the doctrine of piercing the veil of corporate entity, when
valid grounds therefore exist, the legal fiction that a corporation is
an entity with a juridical personality separate and distinct from its
members or stockholders may be disregarded. In such cases, the
corporation will be considered as a mere association of persons.
The members or stockholders of the corporation will be
considered as the corporation, that is, liability will attach directly to
the officers and stockholders. 12 The doctrine applies when the
corporate fiction is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, 13 or when it is made as a
shield to confuse the legitimate issues 14 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. 15
In the case at bar, petitioners seek to pierce the V621 Of
corporate entity of Bormaheco, ICP and PM Parts, alleging that
these corporations employed fraud in causing the foreclosure and
subsequent sale of the real properties belonging to petitioners
While we do not discount the possibility of the existence of fraud
in the foreclosure proceeding, neither are we inclined to apply the
doctrine invoked by petitioners in granting the relief sought. It is
our considered opinion that piercing the veil of corporate entity is
not the proper remedy in order that the foreclosure proceeding
may be declared a nullity under the circumstances obtaining in
the legal case at bar.
In the first place, the legal corporate entity is disregarded only if it
is sought to hold the officers and stockholders directly liable for a
corporate debt or obligation. In the instant case, petitioners do not
seek to impose a claim against the individual members of the
three corporations involved; on the contrary, it is these
corporations which desire to enforce an alleged right against

petitioners. Assuming that petitioners were indeed defrauded by

private respondents in the foreclosure of the mortgaged
properties, this fact alone is not, under the circumstances,
sufficient to justify the piercing of the corporate fiction, since
petitioners do not intend to hold the officers and/or members of
respondent corporations personally liable therefor. Petitioners are
merely seeking the declaration of the nullity of the foreclosure
sale, which relief may be obtained without having to disregard the
aforesaid corporate fiction attaching to respondent corporations.
Secondly, petitioners failed to establish by clear and convincing
evidence that private respondents were purposely formed and
operated, and thereafter transacted with petitioners, with the sole
intention of defrauding the latter.
The mere fact, therefore, that the businesses of two or more
corporations are interrelated is not a justification for disregarding
their separate personalities, 16 absent sufficient showing that the
corporate entity was purposely used as a shield to defraud
creditors and third persons of their rights.
III. The main issue for resolution is whether there was a valid
foreclosure of the mortgaged properties by ICP Petitioners argue
that the foreclosure proceedings should be declared null and void
for two reasons, viz.: (1) no written notice was furnished by
Bormaheco to ICP anent the failure of Slobec in paying its
obligation with the former, plus the fact that no receipt was
presented to show the amount allegedly paid by ICP to
Bormaheco; and (b) at the time of the foreclosure of the
mortgage, the liability of ICP under the surety bond had already
expired.
Respondent court, in finding for the validity of the foreclosure
sale, declared:
Now to the question of whether or not the
foreclosure by the ICP of the real estate
mortgage was in the exercise of a legal right,
We agree with the appellants that the
foreclosure proceedings instituted by the ICP
was in the exercise of a legal right. First, ICP
has in its favor the legal presumption that it
had indemnified Bormaheco by reason of
Slobec's default in the payment of its
obligation under the Sales Agreement,
especially because Bormaheco consented to
ICPs foreclosure of the mortgage. This
presumption is in consonance with pars. R
and Q Section 5, Rule 5, * New Rules of
Court which provides that it is disputably
presumed that private transactions have
been fair and regular. likewise, it is disputably
presumed that the ordinary course of
business has been followed: Second, ICP
had the right to proceed at once to the
foreclosure of the mortgage as mandated by
the provisions of Art. 2071 Civil Code for
these further reasons: Slobec, the principal
debtor, was admittedly insolvent; Slobec's
obligation becomes demandable by reason of
the expiration of the period of payment; and
its authorization to foreclose the mortgage
upon Slobec's default, which resulted in the
accrual of ICPS liability to Bormaheco. Third,
the Agreement of Counter-Guaranty with
Real Estate Mortgage (Exh. 1) expressly
grants to ICP the right to foreclose the real
estate mortgage in the event of 'non-payment
or non-liquidation of the entire indebtedness

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or fraction thereof upon maturity as stipulated

in the contract'. This is a valid and binding
stipulation in the absence of showing that it is
contrary to law, morals, good customs, public
order or public policy. (Art. 1306, New Civil
Code). 17
1. Petitioners asseverate that there was no notice of default
issued by Bormaheco to ICP which would have entitled
Bormaheco to demand payment from ICP under the suretyship
contract.
Surety Bond No. B-1401 0 which was issued by ICP in favor of
Bormaheco, wherein ICP and Slobec undertook to guarantee the
payment of the balance of P180,000.00 payable in eighteen (18)
monthly installments on one unit of Model CAT D-7 Caterpillar
Crawler Tractor, pertinently provides in part as follows:
1.
The
liability
of
INSURANCE
CORPORATION OF THE PHILIPPINES,
under this BOND will expire Twelve (I 2)
months from date hereof. Furthermore, it is
hereby agreed and understood that the
INSURANCE CORPORATION OF THE
PHILIPPINES will not be liable for any claim
not presented in writing to the Corporation
within THIRTY (30) DAYS from the expiration
of this BOND, and that the obligee hereby
waives his right to bring claim or file any
action against Surety and after the
termination of one (1) year from the time his
cause of action accrues. 18
The surety bond was dated October 24, 1970.
However, an annotation on the upper part thereof
states: "NOTE: EFFECTIVITY DATE OF THIS BOND
SHALL BE ON JANUARY 22, 1971." 19
On the other hand, the Sales Agreement dated January 23, 1971
provides that the balance of P180,000.00 shall be payable in
eighteen (18) monthly installments. 20 The Promissory Note
executed by Slobec on even date in favor of Bormaheco further
provides that the obligation shall be payable on or before
February 23, 1971 up to July 23, 1972, and that non-payment of
any of the installments when due shall make the entire obligation
immediately due and demandable. 21
It is basic that liability on a bond is contractual in nature and is
ordinarily restricted to the obligation expressly assumed therein.
We have repeatedly held that the extent of a surety's liability is
determined only by the clause of the contract of suretyship as well
as the conditions stated in the bond. It cannot be extended by
implication beyond the terms the contract. 22
Fundamental likewise is the rule that, except where required by
the provisions of the contract, a demand or notice of default is not
required to fix the surety's liability. 23 Hence, where the contract of
suretyship stipulates that notice of the principal's default be given
to the surety, generally the failure to comply with the condition will
prevent recovery from the surety. There are certain instances,
however, when failure to comply with the condition will not
extinguish the surety's liability, such as a failure to give notice of
slight defaults, which are waived by the obligee; or on mere
suspicion of possible default; or where, if a default exists, there is
excuse or provision in the suretyship contract exempting the

surety for liability therefor, or where the surety already has

knowledge or is chargeable with knowledge of the default. 24
In the case at bar, the suretyship contract expressly provides that
ICP shag not be liable for any claim not filed in writing within thirty
(30) days from the expiration of the bond. In its decision dated
May 25 1987, the court a quo categorically stated that '(n)o
evidence was presented to show that Bormaheco demanded
payment from ICP nor was there any action taken by Bormaheco
on the bond posted by ICP to guarantee the payment of plaintiffs
obligation. There is nothing in the records of the proceedings to
show that ICP indemnified Bormaheco for the failure of the
plaintiffs to pay their obligation. " 25 The failure, therefore, of
Bormaheco to notify ICP in writing about Slobec's supposed
default released ICP from liability under its surety bond.
Consequently, ICP could not validly foreclose that real estate
mortgage executed by petitioners in its favor since it never
incurred any liability under the surety bond. It cannot claim
exemption from the required written notice since its case does not
fall under any of the exceptions hereinbefore enumerated.
Furthermore, the allegation of ICP that it has paid Bormaheco is
not supported by any documentary evidence. Section 1, Rule 131
of the Rules of Court provides that the burden of evidence lies
with the party who asserts an affirmative allegation. Since ICP
failed to duly prove the fact of payment, the disputable
presumption that private transactions have been fair and regular,
as erroneously relied upon by respondent Court of Appeals, finds
no application to the case at bar.
2. The liability of a surety is measured by the terms of his
contract, and, while he is liable to the full extent thereof, such
liability is strictly limited to that assumed by its terms. 26 While
ordinarily the termination of a surety's liability is governed by the
provisions of the contract of suretyship, where the obligation of a
surety is, under the terms of the bond, to terminate at a specified
time, his obligation cannot be enlarged by an unauthorized
extension thereof. 27 This is an exception to the general rule that
the obligation of the surety continues for the same period as that
of the principal debtor. 28
It is possible that the period of suretyship may be shorter than that
of the principal obligation, as where the principal debtor is
required to make payment by installments. 29 In the case at bar,
the surety bond issued by ICP was to expire on January 22, 1972,
twelve (1 2) months from its effectivity date, whereas Slobec's
installment payment was to end on July 23, 1972. Therefore,
while ICP guaranteed the payment by Slobec of the balance of
P180,000.00, such guaranty was valid only for and within twelve
(1 2) months from the date of effectivity of the surety bond, or until
January 22, 1972. Thereafter, from January 23, 1972 up to July
23, 1972, the liability of Slobec became an unsecured obligation.
The default of Slobec during this period cannot be a valid basis
for the exercise of the right to foreclose by ICP since its surety
contract had already been terminated. Besides, the liability of ICP
was extinguished when Bormaheco failed to file a written claim
against it within thirty (30) days from the expiration of the surety
bond. Consequently, the foreclosure of the mortgage, after the
expiration of the surety bond under which ICP as surety has not
incurred any liability, should be declared null and void.
3. Lastly, it has been held that where The guarantor holds
property of the principal as collateral surety for his personal
indemnity, to which he may resort only after payment by himself,
until he has paid something as such guarantor neither he nor the
creditor can resort to such collaterals. 30

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The Agreement of Counter-Guaranty with Chattel/Real Estate

Mortgage states that it is being issued for and in consideration of
the obligations assumed by the Mortgagee-Surety Company
under the terms and conditions of ICP Bond No. 14010 in behalf
of Slobec Realty Development Corporation and in favor of
Bormaheco, Inc. 31 There is no doubt that said Agreement of
Counter-Guaranty is issued for the personal indemnity of ICP
Considering that the fact of payment by ICP has never been
established, it follows, pursuant to the doctrine above adverted to,
that ICP cannot foreclose on the subject properties,

Sarmiento, J., is on leave.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

IV. Private respondent PM Parts posits that it is a buyer in good

faith and, therefore, it acquired a valid title over the subject
properties. The submission is without merit and the conclusion is
specious
We have stated earlier that the doctrine of piercing the veil of
corporate fiction is not applicable in this case. However, its
inapplicability has no bearing on the good faith or bad faith of
private respondent PM Parts. It must be noted that Modesto N.
Cervantes served as Vice-President of Bormaheco and, later, as
President of PM Parts. On this fact alone, it cannot be said that
PM Parts had no knowledge of the aforesaid several transactions
executed between Bormaheco and petitioners. In addition, Atty.
Martin de Guzman, who is the Executive Vice-President of
Bormaheco, was also the legal counsel of ICP and PM Parts.
These facts were admitted without qualification in the stipulation
of facts submitted by the parties before the trial court. Hence, the
defense of good faith may not be resorted to by private
respondent PM Parts which is charged with knowledge of the true
relations existing between Bormaheco, ICP and herein
petitioners. Accordingly, the transfer certificates of title issued in
its name, as well as the certificate of sale, must be declared null
and void since they cannot be considered altogether free of the
taint of bad faith.
WHEREFORE, the decision of respondent Court of Appeals is
hereby REVERSED and SET ASIDE, and judgment is hereby
rendered declaring the following as null and void: (1) Certificate of
Sale, dated September 28,1973, executed by the Provincial
Sheriff of Quezon in favor of the Insurance Corporation of the
Philippines; (2) Transfer Certificates of Title Nos. T-23705, T23706, T-23707 and T-23708 issued in the name of the Insurance
Corporation of the Philippines; (3) the sale by Insurance
Corporation of the Philippines in favor of Philippine Machinery
Parts Manufacturing Co., Inc. of the four (4) parcels of land
covered by the aforesaid certificates of title; and (4) Transfer
Certificates of Title Nos. T-24846, T-24847, T-24848 and T24849
subsequently issued by virtue of said sale in the name of the latter
corporation.
The Register of Deeds of Lucena City is hereby directed to cancel
Transfer Certificates of Title Nos. T-24846, T-24847, T24848 and
T-24849 in the name of Philippine Machinery Parts Manufacturing
Co., Inc. and to issue in lieu thereof the corresponding transfer
certificates of title in the name of herein petitioners, except
Santiago Rivera.
The foregoing dispositions are without prejudice to such other and
proper legal remedies as may be available to respondent
Bormaheco, Inc. against herein petitioners.
SO ORDERED.
Melencio-Herrera (Chairman), Paras and Padilla, JJ., concur.

G.R. No. 125986 January 28, 1999

LUXURIA HOMES, INC., and/or AIDA M. POSADAS, petitioners,
vs.
HONORABLE COURT OF APPEALS, JAMES BUILDER
CONSTRUCTION and/or JAIME T. BRAVO, respondents.
MARTINEZ, J.:
This petition for review assails the decision of the respondent
Court of Appeals dated March 15, 1996, 1 which affirmed with
modification the judgment of default rendered by the Regional
Trial Court of Muntinlupa, Branch 276, in Civil Case No. 92-2592
granting all the reliefs prayed for in the complaint of private
respondents James Builder Construction and/or Jaime T. Bravo.
As culled from the record, the facts are as follows:
Petitioner Aida M. Posadas and her two (2) minor children coowned a 1.6 hectare property in Sucat, Muntinlupa, which was
occupied by squatters. Petitioner Posadas entered into
negotiations with private respondent Jaime T. Bravo regarding the
development of the said property into a residential subdivision. On
May 3, 1989, she authorized private respondent to negotiate with
the squatters to leave the said property. With a written
authorization, respondent Bravo buckled down to work and
started negotiations with the squatters.
Meanwhile, some seven (7) months later, on December 11, 1989,
petitioner Posadas and her two (2) children, through a Deed of
Assignment, assigned the said property to petitioner Luxuria
Homes, Inc., purportedly for organizational and tax avoidance
purposes. Respondent Bravo signed as one of the witnesses to
the execution of the Deed of Assignment and the Articles of
Incorporation of petitioner Luxuria Homes, Inc.
Then sometime in 1992, the harmonious and congenial
relationship of petitioner Posadas and respondent Bravo turned
sour when the former supposedly could not accept the
management contracts to develop the 1.6 hectare property into a
residential subdivision, the latter was proposing. In retaliation,
respondent Bravo demanded payment for services rendered in
connection with the development of the land. In his statement of
account dated 21 August 1991 2 respondent demanded the
payment of P1,708,489.00 for various services rendered, i.e.,
relocation of squatters, preparation of the architectural design and
site development plan, survey and fencing.
Petitioner Posadas refused to pay the amount demanded. Thus,
in September 1992, private respondents James Builder
Construction and Jaime T. Bravo instituted a complaint for specific
performance before the trial court against petitioners Posadas

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and Luxuria Homes, Inc. Private respondents alleged therein that

petitioner Posadas asked them to clear the subject parcel of land
of squatters for a fee of P1,100,000.00 for which they were
partially paid the amount of P461,511.50, leaving a balance of
P638,488.50. They were also supposedly asked to prepare a site
development plan and an architectural design for a contract price
of P450,000.00 for which they were partially paid the amount of
P25,000.00, leaving a balance of P425,000.00. And in anticipation
of the signing of the land development contract, they had to
construct a bunkhouse and warehouse on the property which
amounted to P300,000.00, and a hollow blocks factory for
P60,000.00. Private respondents also claimed that petitioner
Posadas agreed that private respondents will develop the land
into a first class subdivision thru a management contract and that
petitioner Posadas is unjustly refusing to comply with her
obligation to finalize the said management contract.
The prayer in the complaint of the private respondents before the
trial court reads as follows:
WHEREFORE, premises considered, it is
respectfully prayed of this Honorable Court
that after hearing/trial judgment be rendered
ordering defendant to:
a) Comply with its obligation to deliver/finalize
Management Contract of its land in Sucat,
Muntinlupa, Metro Manila and to pay plaintiff
its balance in the amount of P1,708,489.00:
b) Pay plaintiff moral and exemplary
damages in the amount of P500.000.00;
c) Pay plaintiff actual damages in the amount
of P500.000.00 (Bunkhouse/warehouseP300.000.00,
Hollow-block
factoryP60.000.00,
lumber,
cement,
etc.,
P120.000.00, guard-P20.000.00);
d) Pay plaintiff attorney's fee of P50.000 plus
P700 per appearance in court and 5% of that
which may be awarded by the court to
plaintiff re its monetary claims:

3. Moral and
P500.000.00.

exemplary

damages

of

4. Attorney's fee of P50,000.00.

5. And cost of this proceedings.
Defendant
Aida
Posadas
as
the
Representative of the Corporation Luxuria
Homes, Incorporated, is further directed to
execute the management contract she
committed to do, also in consideration of the
various undertakings that Plaintiff rendered
for her. 4
Aggrieved by the aforecited decision, petitioners appealed to
respondent Court of Appeals, which, as aforestated, affirmed with
modification the decision of the trial court. The appellate court
deleted the award of moral damages on the ground that
respondent James Builder Construction is a corporation and
hence could not experience physical suffering and mental
anguish. It also reduced the award of exemplary damages. The
dispositive portion of the decision reads:
WHEREFORE, the decision appealed from is
hereby AFFIRMED with the modification that
the award of moral damages is ordered
deleted and the award of exemplary
damages to the plaintiff's-appellee should
only be in the amount of FIFTY THOUSAND
(P50,000.00) PESOS. 5
Petitioners' motion for reconsideration was denied, prompting the
filing of this petition for review before this Court.
On January 15, 1997, the Third Division of this Court denied due
course to this petition for failing to show convincingly any
reversible error on the part of the Court of Appeals. This Court
however deleted the grant of exemplary damages and attorney's
fees. The Court also reduced the trial court's award of actual
damages from P1,500,000.00 to P500,000.00 reasoning that the
grant should not exceed the amount prayed for in the complaint.
In the prayer in the complaint respondents asked for actual
damages in the amount of P500,000.00 only.

e) Pay cost of this suit. 3

On September 27, 1993, the trial court declared petitioner
Posadas in default and allowed the private respondents to
present their evidence ex-parte. On March 8, 1994, it ordered
petitioner Posadas, jointly and in solidum with petitioner Luxuria
Homes, Inc., to pay private respondents as follows:
1. . . . the balance of the payment for the
various services performed by Plaintiff with
respect to the land covered by TCT NO.
167895 previously No. 158290 in the total
amount of P1,708,489.00.
2. . . . actual damages incurred for the
construction of the warehouse/bunks, and for
the material used in the total sum of
P1,500.000.00.

Still feeling aggrieved with the resolution of this Court, petitioners

filed a motion for reconsideration. On March 17, 1997, this Court
found merit in the petitioners' motion for reconsideration and
reinstated this petition for review.
From their petition for review and motion for reconsideration
before this Court, we now synthesize the issues as follows:
1. Were private respondents able to present ex-parte sufficient
evidence to substantiate the allegations in their complaint and
entitle them to their prayers?
2. Can petitioner Luxuria Homes, Inc., be held liable to private
respondents for the transactions supposedly entered into between
petitioner Posadas and private respondents?
3. Can petitioners be compelled to enter into a management
contract with private respondents?

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Petitioners who were declared in default assert that the private

respondents who presented their evidence ex-parte nonetheless
utterly failed to substantiate the allegations in their complaint and
as such cannot be entitled to the reliefs prayed for.
A perusal of the record shows that petitioner Posadas contracted
respondent Bravo to render various services for the initial
development of the property as shown by vouchers evidencing
payments made by petitioner Posadas to respondent Bravo for
squatter relocation, architectural design, survey and fencing.
Respondents prepared the architectural design, site development
plan and survey in connection with petitioner Posadas' application
with the Housing and Land Use Regulatory Board (HLURB) for
the issuance of the Development Permit, Preliminary Approval
and Locational Clearance. 6 Petitioner benefited from said
services as the Development Permit and the Locational
Clearance were eventually issued by the HLURB in her favor.
Petitioner Posadas is therefore liable to pay for these services
rendered by respondents. The contract price for the survey of the
land is P140,000.00. Petitioner made partial payments totaling
P130,000.00 leaving a payable balance of P10,000.00.
In his testimony, 7 he alleged that the agreed price for the
preparation of the site development plan is P500,000.00 and that
the preparation of the architectural designs is for P450,000, or a
total of P950,000.00 for the two contracts. In his complaint
however, respondent Bravo alleged that he was asked "to prepare
the site development plan and the architectural designs . . . for a
contract price of P450,000.00 . . . " 8 The discrepancy or
inconsistency was never reconciled and clarified.
We reiterate that we cannot award an amount higher than what
was claimed in the complaint. Consequently for the preparation of
both the architectural design and site development plan,
respondent is entitled to the amount of P450,000.00 less partial
payments made in the amount of P25,000.00. In Policarpio v.
RTC of Quezon City, 9 it was held that a court is bereft of
jurisdiction to award, in a judgment by default, a relief other than
that specifically prayed for in the complaint.
As regards the contracts for the ejectment of squatters and
fencing, we believe however that respondents failed to show proof
that they actually fulfilled their commitments therein. Aside from
the bare testimony of respondent Bravo, no other evidence was
presented to show that all the squatters were ejected from the
property. Respondent Bravo failed to show how many shanties or
structures were actually occupying the property before he entered
the same, to serve as basis for concluding whether the task was
finished or not. His testimony alone that he successfully
negotiated for the ejectment of all the squatters from the property
will not suffice.
Likewise, in the case of fencing, there is no proof that it was
accomplished as alleged. Respondent Bravo claims that he
finished sixty percent (60%) of the fencing project but he failed to
present evidence showing the area sought to be fenced and the
actual area fenced by him. We therefore have no basis to
determining the veracity respondent's allegations. We cannot
assume that the said services rendered for it will be unfair to
require petitioner to pay the full amount claimed in case the
respondents obligations were not completely fulfilled.
For respondents' failure to show proof of accomplishment of the
aforesaid services, their claims cannot be granted. In P.T. Cerna
Corp. v. Court of Appeals, 10 we ruled that in civil cases, the

burden of proof rests upon the party who, as determined by the

pleadings or the nature of the case, asserts the affirmative of an
issue. In this case the burden lies on the complainant, who is duty
bound to prove the allegations in the complaint. As this Court has
held, he who alleges a fact has the burden of proving it and A
MERE ALLEGATION IS NOT EVIDENCE.
And the rules do not change even if the defendant is declared in
default. In the leading case of Lopez v. Mendezona, 11 this Court
ruled that after entry of judgment in default against a defendant
who has neither appeared nor answered, and before final
judgment in favor of the plaintiff, the latter must establish by
competent evidence all the material allegations of his complaint
upon which he bases his prayer for relief. In De los Santos v. De
la Cruz, 12 this Court declared that a judgement by default against
a defendant does not imply a waiver of rights except that of being
heard and of presenting evidence in his favor. It does not imply
admission by the defendant of the facts and causes of action of
the plaintiff, because the codal section requires the latter to
adduce his evidence in support of his allegations as an
indispensable condition before final judgment could be given in
his favor. Nor could it be interpreted as an admission by the
defendant that the plaintiff's causes of action finds support in the
law or that the latter is entitled to the relief prayed for.
We explained the rule in judgments by default in Pascua v.
Florendo, 13 where we said that nowhere is it stated that the
complainants are automatically entitled to the relief prayed for,
once the defendants are declared in default. Favorable relief can
be granted only after the court has ascertained that the evidence
offered and the facts proven by the presenting party warrant the
grant of the same. Otherwise it would be meaningless to require
presentation of evidence if everytime the other party is declared in
default, a decision would automatically be rendered in favor of the
non-defaulting party and exactly according to the tenor of his
prayer. In Lim Tanhu v. Ramolete 14 we elaborated and said that
a defaulted defendant is not actually thrown out of court. The
rules see to it that any judgment against him must be in
accordance with law. The evidence to support the plaintiff's cause
is, of course, presented in his absence, but the court is not
supposed to admit that which is basically incompetent. Although
the defendant would not be in a position to object, elementary
justice requires that only legal evidence should be considered
against him. If the evidence presented should not be sufficient to
justify a judgment for the plaintiff, the complaint must be
dismissed. And if an unfavorable judgment should be justifiable, it
cannot exceed the amount or be different in kind from what is
prayed for in the complaint.
The prayer for actual damages in the amount of P500,000.00,
supposedly for the bunkhouse/warehouse, hollow-block factory,
lumber, cement, guard, etc., which the trial court granted and
even increased to P1,500,000.00, and which this Court would
have rightly reduced to the amount prayed for in the complaint,
was not established, as shown upon further review of the record.
No receipts or vouchers were presented by private respondents to
show that they actually spent the amount. In Salas v. Court of
Appeals, 15 we said that the burden of proof of the damages
suffered is on the party claiming the same. It his duty to present
evidence to support his claim for actual damages. If he failed to
do so, he has only himself to blame if no award for actual
damages is handed down.
In fine, as we declared in PNOC Shipping & Transport Corp. v.
Court of Appeals, 16 basic is the rule that to recover actual
damages, the amount of loss must not only be capable of proof
but must actually be proven with reasonable degree of certainty,

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premised upon competent proof or best evidence obtainable of

the actual amount thereof.
We go to the second issue of whether Luxuria Homes, Inc., was a
party to the transactions entered into by petitioner Posadas and
private respondents and thus could be held jointly and severally
with petitioner Posadas. Private respondents contend that
petitioner Posadas surreptitiously formed Luxuria Homes, Inc.,
and transferred the subject parcel of land to it to evade payment
and defraud creditors, including private respondents. This
allegation does not find support in the evidence on record.
On the contrary we hold that respondent Court of Appeals
committed a reversible error when it upheld the factual finding of
the trial court that petitioners' liability was aggravated by the fact
that Luxuria Homes, Inc., was formed by petitioner Posadas after
demand for payment had been made, evidently for her to evade
payment of her obligation, thereby showing that the transfer of her
property to Luxuria Homes, Inc., was in fraud of creditors.
We easily glean from the record that private respondents sent
demand letters on 21 August 1991 and 14 September 1991, or
more than a year and a half after the execution of the Deed of
Assignment on 11 December 1989, and the issuance of the
Articles of Incorporation of petitioner Luxuria Homes on 26
January 1990. And, the transfer was made at the time the
relationship between petitioner Posadas and private respondents
was supposedly very pleasant. In fact the Deed of Assignment
dated 11 December 1989 and the Articles of Incorporation of
Luxuria Homes, Inc., issued 26 January 1990 were both signed
by respondent Bravo himself as witness. It cannot be said then
that the incorporation of petitioner Luxuria Homes and the
eventual transfer of the subject property to it were in fraud of
private respondents as such were done with the full knowledge of
respondent Bravo himself.
Besides petitioner Posadas is not the majority stockholder of
petitioner Luxuria Homes, Inc., as erroneously stated by the lower
court. The Articles of Incorporation of petitioner Luxuria Homes,
Inc., clearly show that petitioner Posadas owns approximately
33% only of the capital stock. Hence petitioner Posadas cannot
be considered as an alter ego of petitioner Luxuria Homes, Inc.
To disregard the separate juridical personality of a corporation,
the wrongdoing must be clearly and convincingly established. It
cannot be presumed. This is elementary. Thus in Bayer-Roxas v.
Court of Appeals, 17 we said that the separate personality of the
corporation may be disregarded only when the corporation is
used as a cloak or cover for fraud or illegality, or to work injustice,
or where necessary for the protection of the creditors. Accordingly
in Del Roscrrio v. NLRC, 18 where the Philsa International
Placement and Services Corp. was organized and registered with
the POEA in 1981, several years before the complainant was filed
a case in 1985, we held that this cannot imply fraud.
Obviously in the instant case, private respondents failed to show
proof that petitioner Posadas acted in bad faith. Consequently
since private respondents failed to show that petitioner Luxuria
Homes, Inc., was a party to any of the supposed transactions, not
even to the agreement to negotiate with and relocate the
squatters, it cannot be held liable, nay jointly and in solidum, to
pay private respondents. In this case since it was petitioner Aida
M. Posadas who contracted respondent Bravo to render the
subject services, only she is liable to pay the amounts adjudged
herein.

We now resolve the third and final issue. Private respondents

urge the court to compel petitioners to execute a management
contract with them on the basis of the authorization letter dated
May 3, 1989. The full text of Exh. "D" reads:
I hereby certify that we have duly authorized
the bearer, Engineer Bravo to negotiate, in
our behalf, the ejectment of squatters from
our property of 1.6 hectares, more or less, in
Sucat Muntinlupa. This authority is extended
to him as the representative of the Managers;
under our agreement for them to undertake
the development of said area and the
construction of housing units intended to
convert the land into a first class subdivision.
The aforecited document is nothing more than a "to-whom-it-mayconcern" authorization letter to negotiate with the squatters.
Although it appears that there was an agreement for the
development of the area, there is no showing that same was ever
perfected and finalized. Private respondents presented in
evidence only drafts of a proposed management contract with
petitioner's handwritten marginal notes but the management
contract was not put in its final form. The reason why there was
no final uncorrected draft was because the parties could not
agree on the stipulations of said contract, which even private
respondents admitted as found by the trial court. 19 As a
consequence the management drafts submitted by the private
respondents should at best be considered as mere unaccepted
offers. We find no cogent reason, considering that the parties no
longer are in a harmonious relationship, for the execution of a
contract to develop a subdivision.
It is fundamental that there can be no contract in the true sense in
the absence of the element of agreement, or of mutual assent of
the parties. To compel petitioner Posadas, whether as
representative of petitioner Luxuria Homes or in her personal
capacity, to execute a management contract under the terms and
conditions of private respondents would be to violate the principle
of consensuality of contracts. In Philippine National Bank v. Court
of Appeals, 20 we held that if the assent is wanting on the part of
one who contracts, his act has no more efficacy than if it had
been done under duress or by a person of unsound mind. In
ordering petitioner Posadas to execute a management contract
with private respondents, the trial court in effect is putting her
under duress.
The parties are bound to fulfill the stipulations in a contract only
upon its perfection. At anytime prior to the perfection of a contract,
unaccepted offers and proposals remain as such and cannot be
considered as binding commitments; hence not demandable.
WHEREFORE, the petition is PARTIALLY GRANTED. The
assailed decision dated March 15, 1996, of respondent Honorable
Court of Appeals and its Resolution dated August 12, 1996, are
MODIFIED ordering PETITIONER AIDA M. POSADAS to pay
PRIVATE RESPONDENTS the amount of P435,000.00 as
balance for the preparation of the architectural design, site
development plan and survey. All other claims of respondents are
hereby DENIED for lack of merit.1wphi1.nt
SO ORDERED.
Davide, Jr., C.J., Melo, Kapunan and Pardo, JJ., concur.

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Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION\
G.R. No. 100866 July 14, 1992
REBECCA BOYER-ROXAS and GUILLERMO ROXAS,
petitioners,
vs.
HON. COURT OF APPEALS and HEIRS OF EUGENIA V.
ROXAS, INC., respondents.

SYLLABUS

1. LEGAL ETHICS; ATTORNEY-CLIENT RELATIONSHIP;

CLIENT BOUND BY THE MISTAKE OF HIS LAWYER;
EXCEPTION. The well-settled doctrine is that the client is
bound by the mistakes of his lawyer. (Aguila v. Court of First
Instance of Batangas, Branch I, 160 SCRA 352 [1988] and other
cases cited) This rule, however, has its exceptions. Thus, in
several cases, we ruled that the party is not bound by the actions
of his counsel in case the gross negligence of the counsel
resulted in the clients deprivation of his property without due
process of law. (Legarda v. Court of Appeals, 195 SCRA 418
[1991])
2. ID.; ID.; ID.; CLIENT IN CASE AT BAR, NOT A VICTIM OF
LAWYERS GROSS NEGLIGENCE. The petitioners were not
victims of the gross negligence of their counsel. They are to be
blamed for the October 22, 1986 order issued by the lower court
submitting the cases for decision. They received notices of the
scheduled hearings and yet they did not do anything. More
specifically, the parties received notice of the Order dated
September 29, 1986 with the warning that if they fail to attend the
October 22, 1986 hearing, the cases would be submitted for
decision based on the evidence on record. Earlier, at the
scheduled hearing on September 29, 1986, the counsel for the
respondent corporation moved that the cases be submitted for
decision for failure of the petitioners and their counsel to attend
despite notice. The lower court denied the motion and gave the
petitioners and their counsel another chance by rescheduling the
October 22, 1986 hearing. Indeed, the petitioners knew all along
that their counsel was not attending the scheduled hearings. They
did not take steps to change their counsel or make him attend to
their cases until it was too late. On the contrary, they continued to
retain the services of Atty. Manicad knowing fully well his lapses
vis-a-vis their cases. They, therefore, cannot raise the alleged
gross negligence of their counsel resulting in their denial of due
process to warrant the reversal of the lower courts decision.
3. COMMERCIAL LAW; CORPORATION LAW; CORPORATION;
WITH JURIDICAL PERSONALITY SEPARATE AND DISTINCT
FROM ITS STOCKHOLDERS. The respondent is a bona fide
corporation. As such, it has a juridical personality of its own
separate from the members composing it. (Western Agro

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Industrial Corporation v. Court of Appeals, 188 SCRA 709 [1990]

and other cases cited)
4. ID.; ID.; ID.; SHARES OF STOCK, AN ALIQUOT PART OF
THE CORPORATIONS PROPERTY. Regarding properties
owned by a corporation, we stated in the case of Stockholders of
F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, (6
SCRA 373 [1962]): ". . . Properties registered in the name of the
corporation are owned by it as an entity separate and distinct from
its members. While shares of stock constitute personal property,
they do not represent property of the corporation. The corporation
has property of its own which consists chiefly of real estate
(Nelson v. Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145
Iowa 1, 123 N.W. 743). A share of stock only typifies an aliquot
part of the corporations property, or the right to share in its
proceeds to that extent when distributed according to law and
equity (Hall & Faley v. Alabama Terminal, 173 Ala., 398, 56 So.
235), but its holder is not the owner of any part of the capital of
the corporation (Bradley v. Bauder, 36 Ohio St., 28). Nor is he
entitled to the possession of any definite portion of its property or
assets (Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio
St., 474). The stockholder is not a co-owner or tenant in common
of the corporate property (Harton v. Johnston, 166 Ala., 317, 51
So., 992)."cralaw virtua1aw library
5. ID.; ID.; ID.; TRANSACTS BUSINESS ONLY THRU ITS
AUTHORIZED OFFICERS OR AGENTS. The corporation
transacts its business only through its officers or agents. (Western
Agro Industrial Corporation v. Court of Appeals, supra) Whatever
authority these officers or agents may have is derived from the
board of directors or other governing body unless conferred by
the charter of the corporation. An officers power as an agent of
the corporation must be sought from the statute, charter, the bylaws or in a delegation of authority to such officer, from the acts of
the board of directors, formally expressed or implied from a habit
or custom of doing business. (Vicente v. Geraldez, 52 SCRA 210
[1973]) In the present case, the record shows that Eufrocino V.
Roxas who then controlled the management of the corporation,
being the majority stockholder, consented to the petitioners stay
within the questioned properties. Specifically, Eufrocino Roxas
gave his consent to the conversion of the recreation hall to a
residential house, now occupied by petitioner Guillermo Roxas.
The Board of Directors did not object to the actions of Eufrocino
Roxas. The petitioners were allowed to stay within the questioned
properties until August 27, 1983, when the Board of Directors
approved
a
Resolution
ejecting
the
petitioners.
6. ID.; ID.; ID.; ID.; ACT OF MANAGING STOCKHOLDER
ALLOWING THIRD PARTY POSSESSION OF CORPORATE
PROPERTY, DOES NOT PRECLUDE THE BOARD OF
EJECTING PARTY; CASE AT BAR. We find nothing irregular in
the adoption of the Resolution by the Board of Directors. The
petitioners stay within the questioned properties was merely by
tolerance of the respondent corporation in deference to the
wishes of Eufrocino Roxas, who during his lifetime, controlled and
managed the corporation. Eufrocino Roxas actions could not
have bound the corporation forever. The petitioners have not cited
any provision of the corporation by-laws or any resolution or act of
the Board of Directors which authorized Eufrocino Roxas to allow
them to stay within the company premises forever. We rule that in
the absence of any existing contract between the petitioners and
the respondent corporation, the corporation may elect to eject the
petitioners at any time it wishes for the benefit and interest of the
respondent corporation.
7. ID.; ID.; PIERCING THE VEIL OF CORPORATE FICTION;
WHEN RESORTED TO; NOT APPLICABLE IN CASE AT BAR.
The petitioners suggestion that the veil of the corporate fiction
should be pierced is untenable. The separate personality of the
corporation may be disregarded only when the corporation is

used "as a cloak or cover for fraud or illegality, or to work injustice,

or where necessary to achieve equity or when necessary for the
protection of the creditors." (Sulo ng Bayan, Inc. v. Araneta, Inc.,
72 SCRA 347 [1976]) The circumstances in the present cases do
not fall under any of the enumerated categories.
8. CIVIL LAWS; PROPERTY; RIGHT OF ACCESSION WITH
RESPECT TO IMMOVABLE PROPERTY; RULE WHERE BOTH
ARE CONSIDERED IN GOOD FAITH; CASE AT BAR. The
petitioners insist that as regards the unfinished building, Rebecca
Boyer-Roxas is a builder in good faith. The construction of the
unfinished building started when Eriberto Roxas, husband of
Rebecca Boyer-Roxas, was still alive and was the general
manager of the respondent corporation. The couple used their
own funds to finance the construction of the building. The Board
of Directors of the corporation, however, did not object to the
construction. They allowed the construction to continue despite
the fact that it was within the property of the corporation. Under
these circumstances, we agree with the petitioners that the
provision of Article 453 of the Civil Code should have been
applied by the lower courts. Article 453 of the Civil Code provides:
"If there was bad faith, not only on the part of the person who
built, planted or sown on the land of another but also on the part
of the owner of such land, the rights of one and the other shall be
the same as though both had acted in good faith." In such a case,
the provisions of Article 448 of the Civil Code govern the
relationship between petitioner Rebecca Boyer-Roxas and the
respondent corporation, to wit: "ART. 448. The owner of the
land on which anything has been built, sown or planted in good
faith, shall have the right to appropriate as his own the works,
sowing or planting after payment of the indemnity provided for in
articles 546 and 548, or to oblige the one who built or planted to
pay the price of the land, and the one who sowed, the proper rent.
However, the builder or planter cannot be obliged to buy the land
if its value is considerably more than that of the building or trees.
In such case, he shall pay reasonable rent, if the owner of the
land does not choose to appropriate the buildings or trees after
proper indemnity. The parties shall agree upon the terms of the
lease and in case of disagreement, the court shall fix the terms
thereof."
GUTIERREZ, JR., J.:
This is a petition to review the decision and resolution of the Court
of Appeals in CA-G.R. No. 14530 affirming the earlier decision of
the Regional Trial Court of Laguna, Branch 37, at Calamba, in the
consolidated RTC Civil Case Nos. 802-84-C and 803-84-C
entitled "Heirs of Eugenia V. Roxas, Inc. v. Rebecca BoyerRoxas" and Heirs of Eugenia V. Roxas, Inc. v. Guillermo Roxas,"
the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is
hereby rendered in favor of the plaintiff and
against the defendants, by ordering as it is
hereby ordered that:
1) In RTC Civil Case No. 802-84-C: Rebecca
Boyer-Roxas and all persons claiming under
her to:
a) Immediately vacate the residential house
near the Balugbugan pool located inside the
premises of the Hidden Valley Springs Resort
at Limao, Calauan, Laguna;
b) Pay the plaintiff the amount of P300.00 per
month from September 10, 1983, for her

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occupancy of the residential house until the

same is vacated;

The cases were consolidated and tried jointly.

At the pre-trial, the parties limited the issues as follows:

c) Remove the unfinished building erected on

the land of the plaintiff within ninety (90) days
from receipt of this decision;
d) Pay the plaintiff the amount of P100.00 per
month from September 10, 1983, until the
said unfinished building is removed from the
land of the plaintiff; and
e) Pay the costs.
2) In RTC Civil Case No. 803-84-C: Guillermo
Roxas and all persons claiming under him to:
a) Immediately vacate the residential house
near the tennis court located within the
premises of the Hidden Valley Springs Resort
at Limao, Calauan, Laguna;
b) Pay the plaintiff the amount of P300.00 per
month from September 10, 1983, for his
occupancy of the said residential house until
the same is vacated; and
c) Pay the costs. (Rollo, p. 36)
In two (2) separate complaints for recovery of possession filed
with the Regional Trial Court of Laguna against petitioners
Rebecca Boyer-Roxas and Guillermo Roxas respectively,
respondent corporation, Heirs of Eugenia V. Roxas, Inc., prayed
for the ejectment of the petitioners from buildings inside the
Hidden Valley Springs Resort located at Limao, Calauan, Laguna
allegedly owned by the respondent corporation.
In the case of petitioner Rebecca Boyer-Roxas (Civil Case No802-84-C), the respondent corporation alleged that Rebecca is in
possession of two (2) houses, one of which is still under
construction, built at the expense of the respondent corporation;
and that her occupancy on the two (2) houses was only upon the
tolerance of the respondent corporation.
In the case of petitioner Guillermo Roxas (Civil Case No. 803-84C), the respondent corporation alleged that Guillermo occupies a
house which was built at the expense of the former during the
time when Guillermo's father, Eriberto Roxas, was still living and
was the general manager of the respondent corporation; that the
house was originally intended as a recreation hall but was
converted for the residential use of Guillermo; and that
Guillermo's possession over the house and lot was only upon the
tolerance of the respondent corporation.
In both cases, the respondent corporation alleged that the
petitioners never paid rentals for the use of the buildings and the
lots and that they ignored the demand letters for them to vacate
the buildings.
In their separate answers, the petitioners traversed the allegations
in the complaint by stating that they are heirs of Eugenia V. Roxas
and therefore, co-owners of the Hidden Valley Springs Resort;
and as co-owners of the property, they have the right to stay
within its premises.

1) whether plaintiff is entitled to recover the

questioned premises;
2) whether plaintiff is entitled to reasonable
rental for occupancy of the premises in
question;
3) whether the defendant is legally authorized
to pierce the veil of corporate fiction and
interpose the same as a defense in an accion
publiciana;
4) whether the defendants are truly builders
in good faith, entitled to occupy the
questioned premises;
5) whether plaintiff is entitled to damages and
reasonable compensation for the use of the
questioned premises;
6) whether the defendants are entitled to their
counterclaim to recover moral and exemplary
damages as well as attorney's fees in the two
cases;
7) whether the presence and occupancy by
the defendants on the premises in questioned
(sic) hampers, deters or impairs plaintiff's
operation of Hidden Valley Springs Resort;
and
8) whether or not a unilateral and sudden
withdrawal of plaintiffs tolerance allowing
defendants' occupancy of the premises in
questioned (sic) is unjust enrichment.
(Original Records, 486)
Upon motion of the plaintiff respondent corporation, Presiding
Judge Francisco Ma. Guerrero of Branch 34 issued an Order
dated April 25, 1986 inhibiting himself from further trying the case.
The cases were re-raffled to Branch 37 presided by Judge Odilon
Bautista. Judge Bautista continued the hearing of the cases.
For failure of the petitioners (defendants below) and their counsel
to attend the October 22, 1986 hearing despite notice, and upon
motion of the respondent corporation, the court issued on the
same day, October 22, 1986, an Order considering the cases
submitted for decision. At this stage of the proceedings, the
petitioners had not yet presented their evidence while the
respondent corporation had completed the presentation of its
evidence.
The evidence of the respondent corporation upon which the lower
court based its decision is as follows:
To support the complaints, the plaintiff offered
the testimonies of Maria Milagros Roxas and
that of Victoria Roxas Villarta as well as
Exhibits "A" to "M-3".

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CORPORATION LAW | 111

The evidence of the plaintiff established the

following: that the plaintiff, Heirs of Eugenia V
Roxas, Incorporated, was incorporated on
December 4, 1962 (Exh. "C") with the primary
purpose of engaging in agriculture to develop
the properties inherited from Eugenia V.
Roxas and that of y Eufrocino Roxas; that the
Articles of Incorporation of the plaintiff, in
1971, was amended to allow it to engage in
the
resort
business
(Exh.
"C-1"); that the incorporators as original
members of the board of directors of the
plaintiff were all members of the same family,
with Eufrocino Roxas having the biggest
share; that accordingly, the plaintiff put up a
resort known as Hidden Valley Springs
Resort on a portion of its land located at Bo.
Limao, Calauan, Laguna, and covered by
TCT No. 32639 (Exhs. "A" and "A-l"); that
improvements were introduced in the resort
by the plaintiff and among them were
cottages, houses or buildings, swimming
pools, tennis court, restaurant and open
pavilions; that the house near the
Balugbugan Pool (Exh. "B-l") being occupied
by Rebecca B. Roxas was originally intended
as staff house but later used as the residence
of Eriberto Roxas, deceased husband of the
defendant Rebecca Boyer-Roxas and father
of Guillermo Roxas; that this house presently
being occupied by Rebecca B. Roxas was
built from corporate funds; that the
construction of the unfinished house (Exh.
"B-2") was started by the defendant Rebecca
Boyer-Roxas and her husband Eriberto
Roxas; that the third building (Exh. "B-3")
presently being occupied by Guillermo Roxas
was originally intended as a recreation hall
but later converted as a residential house;
that this house was built also from corporate
funds; that the said house occupied by
Guillermo Roxas when it was being built had
nipa roofing but was later changed to
galvanized iron sheets; that at the beginning,
it had no partition downstairs and the second
floor was an open space; that the conversion
from a recreation hall to a residential house
was with the knowledge of Eufrocino Roxas
and was not objected to by any of the Board
of Directors of the plaintiff; that most of the
materials used in converting the building into
a residential house came from the materials
left by Coppola, a film producer, who filmed
the movie "Apocalypse Now"; that Coppola
left the materials as part of his payment for
rents of the rooms that he occupied in the
resort; that after the said recreation hall was
converted into a residential house, defendant
Guillermo Roxas moved in and occupied the
same together with his family sometime in
1977 or 1978; that during the time Eufrocino
Roxas was still alive, Eriberto Roxas was the
general manager of the corporation and there
was seldom any board meeting; that
Eufrocino Roxas together with Eriberto Roxas
were (sic) the ones who were running the
corporation; that during this time, Eriberto
Roxas was the restaurant and wine
concessionaire of the resort; that after the
death of Eufrocino Roxas, Eriberto Roxas

continued as the general manager until his

death in 1980; that after the death of Eriberto
Roxas in 1980, the defendants Rebecca B.
Roxas and Guillermo Roxas, committed acts
that impeded the plaintiff's expansion and
normal operation of the resort; that the
plaintiff could not even use its own pavilions,
kitchen and other facilities because of the
acts of the defendants which led to the filing
of criminal cases in court; that cases were
even filed before the Ministry of Tourism,
Bureau of Domestic Trade and the Office of
the President by the parties herein; that the
defendants violated the resolution and orders
of the Ministry of Tourism dated July 28,
1983, August 3, 1983 and November 26,
1984 (Exhs. "G", "H" and "H-l") which ordered
them or the corporation they represent to
desist from and to turn over immediately to
the plaintiff the management and operation of
the restaurant and wine outlets of the said
resort (Exh. "G-l"); that the defendants also
violated the decision of the Bureau of
Domestic Trade dated October 23, 1983
(Exh. "C"); that on August 27, 1983, because
of the acts of the defendants, the Board of
Directors of the plaintiff adopted Resolution
No. 83-12 series of 1983 (Exh. "F")
authorizing the ejectment of the defendants
from the premises occupied by them; that on
September 1, 1983, demand letters were
sent to Rebecca Boyer-Roxas and Guillermo
Roxas (Exhs. "D" and "D-1") demanding that
they vacate the respective premises they
occupy; and that the dispute between the
plaintiff and the defendants was brought
before the barangay level and the same was
not settled (Exhs. "E" and "E-l"). (Original
Records, pp. 454-456)
The petitioners appealed the decision to the Court of Appeals.
However, as stated earlier, the appellate court affirmed the lower
court's decision. The Petitioners' motion for reconsideration was
likewise denied.
Hence, this petition.
In a resolution dated February 5, 1992, we gave due course to the
petition.
The petitioners now contend:
I Respondent Court erred when it refused to pierce the veil of
corporate fiction over private respondent and maintain the
petitioners in their possession and/or occupancy of the subject
premises considering that petitioners are owners of aliquot part of
the properties of private respondent. Besides, private respondent
itself discarded the mantle of corporate fiction by acts and/or
omissions of its board of directors and/or stockholders.
II The respondent Court erred in not holding that petitioners were
in fact denied due process or their day in court brought about by
the gross negligence of their former counsel.
III The respondent Court misapplied the law when it ordered
petitioner Rebecca Boyer-Roxas to remove the unfinished

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CORPORATION LAW | 112

building in RTC Case No. 802-84-C, when the trial court opined
that she spent her own funds for the construction thereof. (CA
Rollo, pp. 17-18)
Were the petitioners denied due process of law in the lower
court?
After the cases were re-raffled to the sala of Presiding Judge
Odilon Bautista of Branch 37 the following events transpired:
On July 3, 1986, the lower court issued an Order setting the
hearing of the cases on July 21, 1986. Petitioner Rebecca V.
Roxas received a copy of the Order on July 15, 1986, while
petitioner Guillermo Roxas received his copy on July 18, 1986.
Atty. Conrado Manicad, the petitioners' counsel received another
copy of the Order on July 11, 1986. (Original Records, p. 260)
On motion of the respondent corporation's counsel, the lower
court issued an Order dated July 15, 1986 cancelling the July 21,
1986 hearing and resetting the hearing to August 11, 1986.
(Original records, 262-263) Three separate copies of the order
were sent and received by the petitioners and their counsel.
(Original Records, pp. 268, 269, 271)
A motion to cancel and re-schedule the August 11, 1986 hearing
filed by the respondent corporation's counsel was denied in an
Order dated August 8, 1986. Again separate copies of the Order
were sent and received by the petitioners and their counsel.
(Original Records, pp. 276-279)
At the hearing held on August 11, 1986, only Atty. Benito P. Fabie,
counsel for the respondent corporation appeared. Neither the
petitioners nor their counsel appeared despite notice of hearing.
The lower court then issued an Order on the same date, to wit:
ORDER
When these cases were called for
continuation of trial, Atty. Benito P. Fabie
appeared before this Court, however, the
defendants and their lawyer despite receipt of
the Order setting the case for hearing today
failed to appear. On Motion of Atty. Fabie,
further cross examination of witness Victoria
Vallarta is hereby considered as having been
waived.
The plaintiff is hereby given twenty (20) days
from today within which to submit formal offer
of evidence and defendants are also given
ten (10) days from receipt of such formal offer
of evidence to file their objection thereto.
In the meantime, hearing in these cases is
set to September 29, 1986 at 10:00 o'clock in
the morning. (Original Records, p. 286)
Copies of the Order were sent and received by the petitioners and
their counsel on the following dates Rebecca Boyer-Roxas on
August 20, 1986, Guillermo Roxas on August 26, 1986, and Atty.
Conrado Manicad on September 19, 1986. (Original Records, pp.
288-290)

On September 1, 1986, the respondent corporation filed its

"Formal Offer of Evidence." In an Order dated September 29,
1986, the lower court issued an Order admitting exhibits "A" to
"M-3" submitted by the respondent corporation in its "Formal Offer
of Evidence . . . there being no objection . . ." (Original Records,
p. 418) Copies of this Order were sent and received by the
petitioners and their counsel on the following dates: Rebecca
Boyer-Roxas on October 9, 1986; Guillermo Roxas on October 9,
1986 and Atty. Conrado Manicad on October 4, 1986 (Original
Records, pp. 420, 421, 428).
The scheduled hearing on September 29, 1986 did not push
through as the petitioners and their counsel were not present
prompting Atty. Benito Fabie, the respondent corporation's
counsel to move that the cases be submitted for decision. The
lower court denied the motion and set the cases for hearing on
October 22, 1986. However, in its Order dated September 29,
1986, the court warned that in the event the petitioners and their
counsel failed to appear on the next scheduled hearing, the court
shall consider the cases submitted for decision based on the
evidence on record. (Original Records, p. 429, 430 and 431)
Separate copies of this Order were sent and received by the
petitioners and their counsel on the following dates: Rebecca
Boyer-Roxas on October 9, 1986, Guillermo Roxas on October 9,
1986; and Atty. Conrado Manicad on October 1, 1986. (Original
Records, pp. 429-430)
Despite notice, the petitioners and their counsel again failed to
attend the scheduled October 22, 1986 hearing. Atty. Fabie
representing the respondent corporation was present. Hence, in
its Order dated October 22, 1986, on motion of Atty. Fabie and
pursuant to the order dated September 29, 1986, the Court
considered the cases submitted for decision. (Original Records, p.
436)
On November 14, 1986, the respondent corporation, filed a
"Manifestation", stating that ". . . it is submitting without further
argument its "Opposition to the Motion for Reconsideration" for
the consideration of the Honorable Court in resolving subject
incident." (Original Records, p. 442)
On December 16, 1986, the lower court issued an Order, to wit:
ORDER
Considering that the Court up to this date has
not received any Motion for Reconsideration
filed by the defendants in the above-entitled
cases, the Court cannot act on the
Opposition to Motion for Reconsideration filed
by the plaintiff and received by the Court on
November 14, 1986. (Original Records, p.
446)
On January 15, 1987, the lower court rendered the questioned
decision in the two (2) cases. (Original Records, pp. 453-459)
On January 20, 1987, Atty. Conrado Manicad, the petitioners'
counsel filed an Ex-Parte Manifestation and attached thereto, a
motion for reconsideration of the October 22, 1986 Order
submitting the cases for decision. He prayed that the Order be set
aside and the cases be re-opened for reception of evidence for
the petitioners. He averred that: 1) within the reglementary period
he prepared the motion for reconsideration and among other

VOLENTI NON FIT INJURIA

CORPORATION LAW | 113

documents, the draft was sent to his law office thru his
messenger; after signing the final copies, he caused the service
of a copy to the respondent corporation's counsel with the
instruction that the copy of the Court be filed; however, there was
a miscommunication between his secretary and messenger in
that the secretary mailed the copy for the respondent
corporation's counsel and placed the rest in an envelope for the
messenger to file the same in court but the messenger thought
that it was the secretary who would file it; it was only later on
when it was discovered that the copy for the Court has not yet
been filed and that such failure to file the motion for
reconsideration was due to excusable neglect and/or accident.
The motion for reconsideration contained the following
allegations: that on the date set for hearing (October 22, 1986),
he was on his way to Calamba to attend the hearing but his car
suffered transmission breakdown; and that despite efforts to
repair said transmission, the car remained inoperative resulting in
his absence at the said hearing. (Original Records, pp. 460-469)
On February 3, 1987, Atty. Manicad filed a motion for
reconsideration of the January 15, 1987 decision. He explained
that he had to file the motion because the receiving clerk refused
to admit the motion for reconsideration attached to the ex-parte
manifestation because there was no proof of service to the other
party. Included in the motion for reconsideration was a notice of
hearing of the motion on February 3, 1987. (Original Records, p.
476-A)
On February 4, 1987, the respondent corporation through its
counsel filed a Manifestation and Motion manifesting that they
received the copy of the motion for reconsideration only today
(February 4, 1987), hence they prayed for the postponement of
the hearing. (Original Records, pp. 478-479)
On the same day, February 4, 1987, the lower court issued an
Order setting the hearing on February 13, 1987 on the ground
that it received the motion for reconsideration late. Copies of this
Order were sent separately to the petitioners and their counsel.
The records show that Atty. Manicad received his copy on
February 11, 1987. As regards the petitioners, the records reveal
that Rebecca Boyer-Roxas did not receive her copy while as
regards Guillermo Roxas, somebody signed for him but did not
indicate when the copy was received. (Original Records, pp. 481483)
At the scheduled February 13, 1987 hearing, the counsels for the
parties were present. However, the hearing was reset for March 6,
1987 in order to allow the respondent corporation to file its
opposition to the motion for reconsideration. (Order dated
February 13, 1987, Original Records, p. 486) Copies of the Order
were sent and received by the petitioners and their counsel on the
following dates: Rebecca Boyer-Roxas on February 23, 1987;
Guillermo Roxas on February 23, 1987 and Atty. Manicad on
February 19, 1987. (Original Records, pp. 487, 489-490)
The records are not clear as to whether or not the scheduled
hearing on March 6, 1987 was held. Nevertheless, the records
reveal that on March 13, 1987, the lower court issued an Order
denying the motion for reconsideration.
The well-settled doctrine is that the client is bound by the
mistakes of his lawyer. (Aguila v. Court of First Instance of
Batangas, Branch I, 160 SCRA 352 [1988]; See also Vivero v.
Santos, et al., 98 Phil. 500 [1956]; Isaac v. Mendoza, 89 Phil. 279
[1951]; Montes v. Court of First Instance of Tayabas, 48 Phil. 640
[1926]; People v. Manzanilla, 43 Phil. 167 [1922]; United States v.
Dungca, 27 Phil. 274 [1914]; and United States v. Umali, 15 Phil.

33 [1910]) This rule, however, has its exceptions. Thus, in several

cases, we ruled that the party is not bound by the actions of his
counsel in case the gross negligence of the counsel resulted in
the client's deprivation of his property without due process of law.
In the case of Legarda v. Court of Appeals (195 SCRA 418
[1991]), we said:
In People's Homesite & Housing Corp. v. Tiongco and
Escasa (12 SCRA 471 [1964]), this Court ruled as follows:
Procedural technicality should not be made a bar to
the vindication of a legitimate grievance. When such
technicality deserts from being an aid to Justice, the
courts are justified in excepting from its operation a
particular case. Where there was something fishy and
suspicious about the actuations of the former counsel
of petitioners in the case at bar, in that he did not give
any significance at all to the processes of the court,
which has proven prejudicial to the rights of said
clients, under a lame and flimsy explanation that the
court's processes just escaped his attention, it is held
that said lawyer deprived his clients of their day in
court, thus entitling said clients to petition for relief
from judgment despite the lapse of the reglementary
period for filing said period for filing said petition.
In Escudero v. Judge Dulay (158 SCRA 69 [1988]),
this Court, in holding that the counsel's blunder in
procedure is an exception to the rule that the client is
bound by the mistakes of counsel, made the
following disquisition:
Petitioners contend, through their new
counsel, that the judgment rendered against
them by the respondent court was null and
void, because they were therein deprived of
their day in court and divested of their
property without due process of law, through
the gross ignorance, mistake and negligence
of their previous counsel. They acknowledge
that, while as a rule, clients are bound by the
mistake of their counsel, the rule should not
be applied automatically to their case, as
their trial counsel's blunder in procedure and
gross ignorance of existing jurisprudence
changed their cause of action and violated
their substantial rights.
We are
impressed
contentions.

with

petitioner's

xxx xxx xxx

While this Court is cognizant of the rule that,
generally, a client will suffer consequences of
the negligence, mistake or lack of
competence of his counsel, in the interest of
Justice and equity, exceptions may be made
to such rule, in accordance with the facts and
circumstances of each case. Adherence to
the general rule would, in the instant case,
result in the outright deprivation of their
property through a technicality.
In its questioned decision dated November
19, 1989 the Court of Appeals found, in no

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CORPORATION LAW | 114

uncertain terms, the negligence of the then

counsel for petitioners when he failed to file
the proper motion to dismiss or to draw a
compromise agreement if it was true that they
agreed on a settlement of the case; or in
simply filing an answer; and that after having
been furnished a copy of the decision by the
court he failed to appeal therefrom or to file a
petition for relief from the order declaring
petitioners in default. In all these instances
the appellate court found said counsel
negligent but his acts were held to bind his
client, petitioners herein, nevertheless.
The Court disagrees and finds that the
negligence of counsel in this case appears to
be so gross and inexcusable. This was
compounded by the fact, that after petitioner
gave said counsel another chance to make
up for his omissions by asking him to file a
petition for annulment of the judgment in the
appellate court, again counsel abandoned the
case of petitioner in that after he received a
copy of the adverse judgment of the appellate
court, he did not do anything to save the
situation or inform his client of the judgment.
He allowed the judgment to lapse and
become final. Such reckless and gross
negligence should not be allowed to bind the
petitioner. Petitioner was thereby effectively
deprived of her day in court. (at pp. 426-427)
The herein petitioners, however, are not similarly situated as the
parties mentioned in the abovecited cases. We cannot rule that
they, too, were victims of the gross negligence of their counsel.
The petitioners are to be blamed for the October 22, 1986 order
issued by the lower court submitting the cases for decision. They
received notices of the scheduled hearings and yet they did not
do anything. More specifically, the parties received notice of the
Order dated September 29, 1986 with the warning that if they fail
to attend the October 22, 1986 hearing, the cases would be
submitted for decision based on the evidence on record. Earlier,
at the scheduled hearing on September 29, 1986, the counsel for
the respondent corporation moved that the cases be submitted for
decision for failure of the petitioners and their counsel to attend
despite notice. The lower court denied the motion and gave the
petitioners and their counsel another chance by rescheduling the
October 22, 1986 hearing.
Indeed, the petitioners knew all along that their counsel was not
attending the scheduled hearings. They did not take steps to
change their counsel or make him attend to their cases until it was
too late. On the contrary, they continued to retain the services of
Atty. Manicad knowing fully well his lapses vis-a-vis their cases.
They, therefore, cannot raise the alleged gross negligence of their
counsel resulting in their denial of due process to warrant the
reversal of the lower court's decision. In a similar case, Aguila v.
Court of First Instance of Batangas, Branch 1 (supra), we ruled:
In the instant case, the petitioner should have
noticed the succession of errors committed
by his counsel and taken appropriate steps
for his replacement before it was altogether
too late. He did not. On the contrary, he
continued to retain his counsel through the
series of proceedings that all resulted in the

rejection of his cause, obviously through such

counsel's "ineptitude" and, let it be added, the
clients' forbearance. The petitioner's reverses
should have cautioned him that his lawyer
was mishandling his case and moved him to
seek the help of other counsel, which he did
in the end but rather tardily.
Now petitioner wants us to nullify all of the
antecedent proceedings and recognize his
earlier claims to the disputed property on the
justification that his counsel was grossly
inept. Such a reason is hardly plausible as
the petitioner's new counsel should know.
Otherwise, all a defeated party would have to
do to salvage his case is claim neglect or
mistake on the part of his counsel as a
ground for reversing the adverse judgment.
There would be no end to litigation if these
were allowed as every shortcoming of
counsel could be the subject of challenge by
his client through another counsel who, if he
is also found wanting, would likewise be
disowned by the same client through another
counsel, and so on ad infinitum. This would
render court proceedings indefinite, tentative
and subject to reopening at any time by the
mere subterfuge of replacing counsel. (at pp.
357-358)
We now discuss the merits of the cases.
In the first assignment of error, the petitioners maintain that their
possession of the questioned properties must be respected in
view of their ownership of an aliquot portion of all the properties of
the respondent corporation being stockholders thereof. They
propose that the veil of corporate fiction be pierced, considering
the circumstances under which the respondent corporation was
formed.
Originally, the questioned properties belonged to Eugenia V.
Roxas. After her death, the heirs of Eugenia V. Roxas, among
them the petitioners herein, decided to form a corporation
Heirs of Eugenia V. Roxas, Incorporated (private respondent
herein) with the inherited properties as capital of the corporation.
The corporation was incorporated on December 4, 1962 with the
primary purpose of engaging in agriculture to develop the
inherited properties. The Articles of Incorporation of the
respondent corporation were amended in 1971 to allow it to
engage in the resort business. Accordingly, the corporation put up
a resort known as Hidden Valley Springs Resort where the
questioned properties are located.
These facts, however, do not justify the position taken by the
petitioners.
The respondent is a bona fide corporation. As such, it has a
juridical personality of its own separate from the members
composing it. (Western Agro Industrial Corporation v. Court of
Appeals, 188 SCRA 709 [1990]; Tan Boon Bee & Co., Inc. v.
Jarencio, 163 SCRA 205 [1988]; Yutivo Sons Hardware Company
v. Court of Tax Appeals, 1 SCRA 160 [1961]; Emilio Cano
Enterprises, Inc. v. Court of Industrial Relations, 13 SCRA 290
[1965]) There is no dispute that title over the questioned land
where the Hidden Valley Springs Resort is located is registered in
the name of the corporation. The records also show that the staff
house being occupied by petitioner Rebecca Boyer-Roxas and

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CORPORATION LAW | 115

the recreation hall which was later on converted into a residential

house occupied by petitioner Guillermo Roxas are owned by the
respondent corporation. Regarding properties owned by a
corporation, we stated in the case of Stockholders of F. Guanzon
and Sons, Inc. v. Register of Deeds of Manila, (6 SCRA 373
[1962]):

questioned properties. Specifically, Eufrocino Roxas gave his

consent to the conversion of the recreation hall to a residential
house, now occupied by petitioner Guillermo Roxas. The Board of
Directors did not object to the actions of Eufrocino Roxas. The
petitioners were allowed to stay within the questioned properties
until August 27, 1983, when the Board of Directors approved a
Resolution ejecting the petitioners, to wit:

xxx xxx xxx

R E S O L U T I O N No. 83-12
. . . Properties registered in the name of the
corporation are owned by it as an entity
separate and distinct from its members.
While shares of stock constitute personal
property, they do not represent property of
the corporation. The corporation has property
of its own which consists chiefly of real estate
(Nelson v. Owen, 113 Ala., 372, 21 So. 75;
Morrow v. Gould, 145 Iowa 1, 123 N.W. 743).
A share of stock only typifies an aliquot part
of the corporation's property, or the right to
share in its proceeds to that extent when
distributed according to law and equity (Hall
& Faley v. Alabama Terminal, 173 Ala., 398,
56 So. 235), but its holder is not the owner of
any part of the capital of the corporation
(Bradley v. Bauder, 36 Ohio St., 28). Nor is
he entitled to the possession of any definite
portion of its property or assets (Gottfried V.
Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio
St., 474). The stockholder is not a co-owner
or tenant in common of the corporate
property (Harton v. Johnston, 166 Ala., 317,
51 So. 992). (at pp. 375-376)
The petitioners point out that their occupancy of the staff house
which was later used as the residence of Eriberto Roxas,
husband of petitioner Rebecca Boyer-Roxas and the recreation
hall which was converted into a residential house were with the
blessings of Eufrocino Roxas, the deceased husband of Eugenia
V. Roxas, who was the majority and controlling stockholder of the
corporation. In his lifetime, Eufrocino Roxas together with Eriberto
Roxas, the husband of petitioner Rebecca Boyer-Roxas, and the
father of petitioner Guillermo Roxas managed the corporation.
The Board of Directors did not object to such an arrangement.
The petitioners argue that . . . the authority thus given by
Eufrocino Roxas for the conversion of the recreation hall into a
residential house can no longer be questioned by the
stockholders of the private respondent and/or its board of
directors for they impliedly but no leas explicitly delegated such
authority to said Eufrocino Roxas. (Rollo, p. 12)
Again, we must emphasize that the respondent corporation has a
distinct personality separate from its members. The corporation
transacts its business only through its officers or agents. (Western
Agro Industrial Corporation v. Court of Appeals, supra). Whatever
authority these officers or agents may have is derived from the
board of directors or other governing body unless conferred by
the charter of the corporation. An officer's power as an agent of
the corporation must be sought from the statute, charter, the bylaws or in a delegation of authority to such officer, from the acts of
the board of directors, formally expressed or implied from a habit
or custom of doing business. (Vicente v. Geraldez, 52 SCRA 210
[1973])
In the present case, the record shows that Eufrocino V. Roxas
who then controlled the management of the corporation, being the
majority stockholder, consented to the petitioners' stay within the

RESOLVED, That Rebecca B. Roxas and

Guillermo Roxas, and all persons claiming
under them, be ejected from their occupancy
of the Hidden Valley Springs compound on
which their houses have been constructed
and/or are being constructed only on
tolerance of the Corporation and without any
contract therefor, in order to give way to the
Corporation's expansion and improvement
program and obviate prejudice to the
operation of the Hidden Valley Springs Resort
by their continued interference.
RESOLVED, Further that the services of Atty.
Benito P. Fabie be engaged and that he be
authorized as he is hereby authorized to
effect the ejectment, including the filing of the
corresponding suits, if necessary to do so.
(Original Records, p. 327)
We find nothing irregular in the adoption of the Resolution by the
Board of Directors. The petitioners' stay within the questioned
properties was merely by tolerance of the respondent corporation
in deference to the wishes of Eufrocino Roxas, who during his
lifetime, controlled and managed the corporation. Eufrocino
Roxas' actions could not have bound the corporation forever. The
petitioners have not cited any provision of the corporation by-laws
or any resolution or act of the Board of Directors which authorized
Eufrocino Roxas to allow them to stay within the company
premises forever. We rule that in the absence of any existing
contract between the petitioners and the respondent corporation,
the corporation may elect to eject the petitioners at any time it
wishes for the benefit and interest of the respondent corporation.
The petitioners' suggestion that the veil of the corporate fiction
should be pierced is untenable. The separate personality of the
corporation may be disregarded only when the corporation is
used "as a cloak or cover for fraud or illegality, or to work injustice,
or where necessary to achieve equity or when necessary for the
protection of the creditors." (Sulong Bayan, Inc. v. Araneta, Inc.,
72 SCRA 347 [1976] cited in Tan Boon Bee & Co., Inc., v.
Jarencio, supra and Western Agro Industrial Corporation v. Court
of Appeals, supra) The circumstances in the present cases do not
fall under any of the enumerated categories.
In the third assignment of error, the petitioners insist that as
regards the unfinished building, Rebecca Boyer-Roxas is a
builder in good faith.
The construction of the unfinished building started when Eriberto
Roxas, husband of Rebecca Boyer-Roxas, was still alive and was
the general manager of the respondent corporation. The couple
used their own funds to finance the construction of the building.
The Board of Directors of the corporation, however, did not object
to the construction. They allowed the construction to continue
despite the fact that it was within the property of the corporation.

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Under these circumstances, we agree with the petitioners that the

provision of Article 453 of the Civil Code should have been
applied by the lower courts.
Article 453 of the Civil Code provides:
If there was bad faith, not only on the part of
the person who built, planted or sown on the
land of another but also on the part of the
owner of such land, the rights of one and the
other shall be the same as though both had
acted in good faith.
In such a case, the provisions of Article 448 of the Civil Code
govern the relationship between petitioner Rebecca-Boyer-Roxas
and the respondent corporation, to wit:
Art. 448 The owner of the land on which
anything has been built, sown or planted in
good faith, shall have the right to appropriate
as his own the works, sowing or planting after
payment of the indemnity provided for in
articles 546 and 548, or to oblige the one who
built or planted to pay the price of the land,
and the one who sowed, the proper rent.
However, the builder or planter cannot be
obliged to buy the land if its value is
considerably more than that of the building or
trees. In such case, he shall pay reasonable
rent, if the owner of the land does not choose
to appropriate the buildings or trees after
proper indemnity. The parties shall agree
upon the terms of the lease and in case of
disagreement, the court shall fix the terms
thereof.
WHEREFORE, the present petition is partly GRANTED. The
questioned decision of the Court of Appeals affirming the decision
of the Regional Trial Court of Laguna, Branch 37, in RTC Civil
Case No. 802-84-C is MODIFIED in that subparagraphs (c) and
(d) of Paragraph 1 of the dispositive portion of the decision are
deleted. In their stead, the petitioner Rebecca Boyer-Roxas and
the respondent corporation are ordered to follow the provisions of
Article 448 of the Civil Code as regards the questioned unfinished
building in RTC Civil Case No. 802-84-C. The questioned
decision is affirmed in all other respects.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 131729 May 19, 1998
UNION BANK OF THE PHILIPPINES, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, COMMISSIONER FE
ELOISA C. GLORIA, ATTY. MANOLITO SOLLER, IN THEIR
CAPACITY AS CHAIRPERSON AND MEMBER,
RESPECTIVELY, OF THE HEARING PANEL OF THE
SECURITIES AND EXCHANGE COMMISSION, EULOGIO O.
YUTINGCO, CAROLINE YUTINGCO-YAO, THERESA I. LAO,
NIKON INDUSTRIAL CORPORATION, NIKOLITE INDUSTRIAL
CORPORATION, THAMES PHILIPPINES, INC., 2000
INDUSTRIES CORPORATION, TRADE HOPE INDUSTRIAL
CORPORATION, FIRST UNI-BRANDS FOOD CORPORATION,
INTEGRAL STEEL CORPORATION, CLARION PRINTING
HOUSE, INC., NIKON PLAZA, INC., NIKON LAND
CORPORATION, EYCO PROPERTIES, INC., INTERIM
RECEIVERS AMELIA B. CABAL, as representative of SGV,
INOCENCIO B. DEZA, JR., as representative of PNB, and
FLORENCIO B. ORENDAIN of EYCO, respondents.

ROMERO, J.:
It has been about a year since the Thai baht plummeted to a
record low and sparked the downspin of most of Asia's other
currencies including our very own peso. The Philippines has not
suffered as much from the full impact of the region's worst
financial turmoil when most neighboring economies are still
sluggishly inching their way towards recovery. Tested economic
initiatives often hailed for helping save the country from losing its
hard-earned gains cannot hide the fact that some businesses are
still going downhill in light of serious liquidity problems resulting
from said crisis. Private respondents' present predicament is one
such example and from which they now intend to free themselves.
The road to recovery seems elusive though. Private respondents'
bid to salvage their collapsing businesses by seeking suspension
of payments a statutory device allowing distressed debtors to
defer payment of their debts now faces a major hindrance as
petitioner challenges their recourse to said remedy.
The records disclose the following antecedent facts:
On September 16, 1997, private respondents EYCO Group of
Companies ("EYCO"), 1 Eulogio O. Yutingco, Caroline YutingcoYao, and Theresa T. Lao (the "Yutingcos"), all of whom are
controlling stockholders of the aforementioned corporations,
jointly filed with the SEC a Petition for the Declaration of
Suspension of Payment[s], Formation and Appointment of
Rehabilitation Receiver/Committee, Approval of Rehabilitation
Plan with Alternative Prayer for Liquidation and Dissolution of
Corporations 2 alleging, among other things, that "the present

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combined financial condition of the petitioners clearly indicates

that their assets are more than enough to pay off the credits" but
that due to "factors beyond the control and anticipation of the
management . . . the inability of the EYCO Group of Companies
to meet the obligations as they fall due on the schedule agreed
with the [creditors] has now become a stark reality." 3 In a footnote
to said petition, 4 the Yutingcos justified their inclusion as copetitioners before the SEC on the ground that they had personally
bound themselves to EYCO's creditors under a J.S.S. Clause
(Joint Several Solidary Guaranty).
Upon finding the above petition to be sufficient in form and
substance, the SEC Hearing Panel then composed of Manolito S.
Soller, George P. Palmares and Rommel G. Oliva issued an order
5
dated September 19, 1997 setting its hearing on October 22,
1997. At the same time, said panel also directed the suspension
of all actions, claims and proceedings against private respondents
pending before any court, tribunal, office, board and/or
commission.
Meanwhile, some of private respondents' creditors, composed
mainly of twenty-two (22) domestic banks (the "consortium") 6
including herein petitioner Union Bank of the Philippines, 7 also
convened on September 19, 1997 for the purpose of deciding
their options in the event that private respondents invoke the
provisions of Presidential Decree No. 902-A, as amended. The
minutes 8 embodying the terms agreed upon by the consortium in
said meeting provided, inter alia, for the following:
. . . In response to this, the following were actions
agreed upon by all the creditor banks present:
Hire a lawyer to advise the banks on the legal matters
of suspension of payments. Atty. Balgos was engaged
to be the legal counsel.
Form a management committee to represent all the
creditor banks. This will be composed of the first seven
banks with the highest exposures, namely:
Philippine National Bank
Far East Bank and Trust Co.
Traders Royal Bank
Allied Banking Corporation
Philippine
Commercial
International Bank

and

Bank of Commerce
Westmont Bank
The other creditor Banks will be informed as often as
needed.
Without notifying the members of the consortium, petitioner,
however, decided to break away from the group by suing private
respondents in the regular courts. These cases are:

Civil Case No. 97-2184 (Union Bank of the Philippines v. Nikon

Industrial Corporation, et al.) for Sum of Money with Application
for Preliminary Attachment filed before the Regional Trial Court of
Makati, Branch 148, on September 23, 1997; 9
Civil Case No. 5360-V-97 (Union Bank of the Philippines v.
Eulogio and Bee Kuan Yutingco, et al.) for Annulment, Rescission
of Titles/Injunction with prayer for Issuance of Preliminary
Mandatory Injunction filed before the Regional Trial Court of
Valenzuela, Branch 172, on September 24, 1997; 10
Civil Case No. 66477 (Union Bank of the Philippines v. Eulogio
and Bee Kuan Yutingco, et al.) for Annulment, Rescission of
Titles/Injunction with Prayer for Issuance of Preliminary
Mandatory Injunction filed before the Regional Trial Court of
Pasig, City, Branch 157, on September 26, 1997;
Civil Case No. 66479 (Union Bank of the Philippines v. Eulogio
and Bee Kuan Yutingco, et al.) for Annulment, Rescission of
Titles/Injunction with Prayer for Issuance of Preliminary
Mandatory Injunction filed before the Regional Trial Court of Pasig
City, Branch 159, on September 24, 1997; and
Civil Case No. 66478 (Union Bank of the Philippines v. Eulogio
and Bee Kuan Yutingco and Enrique Yao) for Annulment,
Rescission of Titles/Injunction with Prayer for Issuance of
Preliminary Mandatory Injunction filed before the Regional Trial
Court of Pasig City, Branch 158, on September 25, 1997.
In the meantime, the SEC issued an order 11 on October 3, 1997,
appointing (a) Amelia B. Cabal of SGV & Co., as common
representative; (b) Inocencio Deza, Jr., of the Philippine National
Bank as representative of the creditor-banks; and (c) Atty.
Florencio B. Orendain as representative of the EYCO Group and
the Yutingcos, to act collectively as interim receivers of the
distressed corporations.
Aside from commencing suits in the regular courts, petitioner also
vehemently opposed private respondents' petition for suspension
of payments in the SEC by filing a Motion to Dismiss on October
22, 1997. 12 It contended that the SEC was bereft of jurisdiction
over such petition on the ground that the inclusion of the
Yutingcos in the petition "cannot be allowed since the authority
and power of the Commission under the (sic) virtue of [the] law
applies only to corporations, partnership[s] and other forms of
associations, and not to individual petitioners who are not clearly
covered by P.D. 902-A as amended." According to petitioner, what
should have been applied instead was the provision on
suspension of payments under Act No. 1956, otherwise known as
the "Insolvency Law," which mandated the filing of the petition in
the Regional Trial Court and not in the SEC. Finally, petitioner
disputed private respondents' recourse to suspension of
payments alleging that the latter prejudiced their creditors by
fraudulently disposing of corporate properties within the 30-day
period prior to the filing of such petition.
Subsequently, a creditors' meeting was again convened pursuant
to SEC's earlier order dated September 19, 1997, wherein the
matter of creating a management committee (the "Mancom") was
submitted for resolution. Apparently, only petitioner opposed the
creation of said Mancom as it filed earlier with the SEC its Motion
to Dismiss.
The SEC Hearing Panel composed of Hon. Fe Eloisa C. Gloria
and Manolito S. Soller subsequently issued an Omnibus Order 13
on October 27, 1997, directing this time the creation of the

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Mancom consisting of seven (7) members; four (4) of whom shall

come from the creditor banks, one (1) from the non-bank
creditors, one (1) from the petitioners and one (1) to be appointed
by the SEC. Moreover, the panel likewise granted an earlier
Urgent Motion for Reconsideration filed by creditor banks which
sought to annotate the September 19, 1997 suspension order on
the titles of the properties of the private respondent corporations.
In issuing said order, the panel resolved that the interest of private
respondents and their creditors could be best served if such
Mancom is created. It is noteworthy, however, that this directive
expressly stated that the same was without prejudice to the
resolution of petitioner's Motion to Dismiss whose scheduled
hearing was set by petitioner itself on October 29, 1997.
Aggrieved, petitioner immediately took recourse to the Court of
Appeals on October 29, 1997 by filing therewith a Petition for
Certiorari with Prayer for the Issuance of a Temporary Restraining
Order and/or Writ of Preliminary Injunction 14 under Rule 65 of the
1997 Rules of Civil Procedure. It imputed grave abuse of
discretion on the part of the SEC Hearing Panel in precipitately
issuing the suspension order dated September 19, 1997 and in
prematurely directing the creation of the Mancom prior to the
scheduled hearing of its Motion to Dismiss on October 29, 1997.
Petitioner lamented that these actions of the panel deprived it of
due process by effectively rendering moot and academic its
Motion to Dismiss which allegedly presented a prejudicial
question to the propriety of creating a Mancom. Furthermore, it
insisted that jurisdiction over private respondents' petition properly
pertained to the Regional Trial Courts under Act No. 1956 and
that, in any event, private respondents were not entitled to
suspension of payments since they had already committed
fraudulent dispositions of their properties.
Without giving due course to Union Bank's petition, the appellate
court issued a resolution 15 on October 31, 1997 directing private
respondents to submit their comment on the petition while
temporarily restraining the SEC from appointing the members of
the Mancom, annotating the suspension orders on the titles of the
properties of private respondents, and taking further proceedings
with regard to the suspension of payments and/or rehabilitation.
Meanwhile, members of the so-called steering committee of the
consortium composed of the Philippine National Bank, Far East
Bank and Trust Company, Allied Bank, Traders Royal Bank,
Philippine Commercial International Bank, Bank of Commerce,
and Westmont Bank (the "Intervenors") filed with the appellate
court an Urgent Motion for Intervention 16 and a Consolidated
Intervention and Counter-Motion for Contempt and for the
Imposition of Disciplinary Measures Against Petitioner's Counsel 17
both dated November 3, 1997 claiming that they were not
impleaded at all by petitioner in its petition before the appellate
court when in fact they had actual, material, direct and legal
interest in the outcome of said case as owners of at least eightyfive percent (85%) of private respondents' obligations. Moreover,
they opposed said petition because of petitioner's ostensible
failure to exhaust administrative remedies in the consortium and
in the SEC and for being guilty of forum-shopping in the appellate
court as its Motion to Dismiss in the SEC was yet to be resolved
at the time.
Petitioner, however, countered intervenors' motion in its
Opposition to Urgent Motion for Intervention and Reply to the
Comment-in-Intervention, 18 vehemently challenging the existence
of a consortium, its membership therein, the intervenors'
ownership of at least eighty-five percent (85%) of private
respondents' obligations and their due representation of the
twenty-two (22) creditor banks, the existence of an agreement
drawn up during the September 19, 1997 meeting regarding the

satisfaction of the individual exposures of the creditor banks, and

its consent to the creation of the Mancom. It also denied
intervenors' accusation of forum-shopping and non-exhaustion of
administrative remedies on the ground that it was acting with a
sense of urgency, the Hearing Panel having already created the
Mancom and was about to appoint the members thereof at the
same time.
After several exchanges of pleadings between the parties, the
Court of Appeals First Division finally rendered its assailed
decision 19 on December 22, 1997, granting intervention of the
seven (7) creditor banks named above while dismissing the
petition for failure to exhaust administrative remedies and forumshopping. Nothing in the said decision, however, indicates that the
appellate court squarely confronted the issue of jurisdiction raised
earlier by petitioner.
Without moving for reconsideration of the appellate court's
decision, petitioner elevated the said matter to this Court through
a Petition for Certiorari with Prayer for the Issuance of a
Temporary Restraining Order and/or Writ of Preliminary Injunction
20
filed on December 29, 1997. Petitioner, however, seasonably
amended 21 the same on January 5, 1998.
Upon being notified by petitioner that the SEC Hearing Panel had
already appointed members of the proposed Mancom on January
5, 1998, 22 this Court issued a resolution 23 on January 6, 1998,
granting the temporary restraining order (TRO) prayed for in the
petition and requiring all the respondents to comment thereon.
Both EYCO and the Yutingcos duly filed their Comment 24 on
January 14, 1998 asking the Court to cite petitioner and its
counsel for contempt because of deliberate forum-shopping,
assailing the propriety of the temporary restraining order which we
issued, and arguing that Union Bank's petition should be
dismissed outright for (1) categorizing it as having been filed both
under Rule 45 and Rule 65 of the 1997 Rules of Civil Procedure;
(2) failing to move for reconsideration before the Court of Appeals;
(3) failing to implead indispensable parties; (4) raising factual
allegations of fraud; (5) forum-shopping; and (6) failing to exhaust
administrative remedies.
On January 27, 1998, the intervenors before the appellate court
also came to us through an Urgent Manifestation, 25 seeking the
outright dismissal of the petition on grounds of forum-shopping
and failure to implead them as indispensable parties which
allegedly violated Section 4, Rule 45 of the 1997 Rules of Civil
Procedure requiring that the petition should "state the name of the
appealing party as the petitioner and the adverse party as
respondent."
For their part, the interim receivers who are also impleaded as
private respondents in the instant petition, filed their own
Comment 26 on January 30, 1998, likewise contending that
petitioner failed to exhaust administrative remedies when it leapfrogged to the Court of Appeals and that, in any case, the SEC
had jurisdiction to entertain private respondents' petition for
suspension of payments.
In response to the respective comments of private respondents
and interim receivers, petitioner filed its Consolidated Reply and
Opposition 27 on February 5, 1998, reiterating its earlier position
that (1) the SEC had no jurisdiction to entertain private
respondents' petition for suspension of payments; (2) private
respondents are already bankrupt because of the alleged
fraudulent dispositions they have made and, hence, are no longer

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entitled to the remedy of suspension of payments; (3) prior motion

for reconsideration is not indispensable when, as in this case,
there is an actual threat that the Mancom members would soon
be appointed; (4) intervenors are not indispensable parties; and
(5) there is no forum-shopping.
Complaining that daily interests on its outstanding debts continue
mounting by the millions and that the work of the SEC-appointed
interim receivers has been paralyzed for quite some time, private
respondents filed an Urgent Motion 28 on February 12, 1998
praying that the temporary restraining order be lifted for the
preservation of their assets and to pave the way for rehabilitation.
They likewise asked, among other things, that their motion to cite
petitioner and its counsel for contempt be immediately resolved.
Petitioner, in turn, filed a Motion to Cite Yutingcos and Their
Counsel in Contempt 29 for allegedly misleading this Court in
stating that Union Bank failed to pay the required deposit for
costs, that they were not served a copy of the Amended Petition,
and that they never nominated Sycip, Gorres, Velayo & Co. (the
"SGV") as rehabilitation receiver.
As may be gleaned from the above factual account, there are only
two basic and outstanding issues in the instant case which require
our resolution, namely:
(1) Whether the SEC can validly acquire jurisdiction
over a petition for suspension of payments filed
pursuant to Section 5 (d) of P.D. No. 902 A, as
amended, when such petition joins as co-petitioners the
petitioning
corporate
entities
AND
individual
stockholders thereof; and
(2) Whether petitioner engaged in forum-shopping and
failed to exhaust administrative remedies in taking
direct recourse to the Court of Appeals to challenge the
assumption of jurisdiction by the SEC Hearing Panel
over private respondents' petition for suspension of
payments.
We shall discuss these issues seriatim.
I. Jurisdiction of the Securities and Exchange Commission
It is already a well-settled jurisprudential precept that jurisdiction
over a subject matter is conferred by law. 30 In this regard, the
pertinent provision of law conferring jurisdiction upon the SEC
over petitions for suspension of payments such as the one filed
earlier by private respondents provides:
Sec. 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission
over corporations, partnerships and other forms of
associations registered with it as expressly granted
under existing laws and decrees, it shall have original
and exclusive jurisdiction to hear and decide cases
involving.
xxx xxx xxx
(d) Petitions of corporations, partnerships or
associations to be declared in the state of suspension
of payments in cases where the corporation,
partnership or association possesses sufficient property

to cover all its debts but foresees the impossibility of

meeting them when they respectively fall due or in
cases where the corporation, partnership or association
has no sufficient assets to cover its liabilities, but is
under the management of a Rehabilitation Receiver or
Management Committee created pursuant to this
Decree. (As added by P.D. No. 1758).
As stated earlier, it is precisely on the basis of the above provision
that petitioner now avers that the SEC cannot validly entertain
private respondents' petition for suspension of payments. Its
reason is that the law vesting jurisdiction upon the SEC to hear
petitions of this kind limits itself to petitions filed only by
corporations, partnerships or associations. Petitioner thus asserts
that the petition filed by private respondents with the SEC should
have been dismissed because it was not such a kind of petition
filed solely by corporations when it impleaded as co-petitioners
the Yutingcos who are individual persons upon whom said body
cannot acquire jurisdiction.
We fully agree with petitioner in contending that the SEC's
jurisdiction on matters of suspension of payments is confined only
to those initiated by corporations, partnerships or associations.
Actually, this is not the first time that the Court has encountered
an issue as the one at bar. It has made a similar pronouncement
in the seminal case of Chung Ka Bio v. Intermediate Appellate
Court, et al., 31 likewise involving a petition for suspension of
payments filed by a corporate entity and an individual stockholder,
where we ruled that:
This section [referring to Section 5 (d) of P.D. No. 902A, as amended] clearly does not allow a mere
individual to file the petition which is limited to
"corporations,
partnerships
or
associations."
Administrative agencies like the SEC are tribunals of
limited jurisdiction and, as such, can exercise only
those powers which are specifically granted to them by
their enabling statutes. Consequently, where no
authority is granted to hear petitions of individuals for
suspension of payments, such petitions are beyond the
competence of the SEC. . .
The circumstance that Ching is a co-signer in the
corporation's promissory notes, collateral or guarantee
or security agreements, does not make him a proper
party. Jurisdiction over the subject matter must exist as
a matter of law and cannot be fixed by agreement of the
parties, acquired through, or waived, enlarged or
diminished by, any act or omission; neither can it be
conferred by acquiescence of the tribunal. Hence,
Alfredo Ching, as a mere individual, cannot be allowed
as a co-petitioner in SEC Case No. 2250. [Emphasis
supplied].
This Court reinforced further the above dictum in Traders Royal
Bank v. Court of Appeals, et al., 32 a sequel to Chung Ka Bio,
where we declared:
Although Ching was impleaded in SEC Case No. 2250,
as a co-petitioner of PBM [Philippine Blooming Mills],
the SEC could not assume jurisdiction over his person
and properties. The Securities and Exchange
Commission was empowered, as rehabilitation receiver,
to take custody and control of the assets and properties
of PBM only, for the SEC has jurisdiction over
corporations only not over private individuals, except
stockholders in an intra-corporate dispute (Sec. 5, P.D.

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902-A and Sec. 2 of P.D. 1758). Being a nominal party

in SEC Case No. 2250, Ching's properties were not
included in the rehabilitation receivership that the SEC
constituted to take custody of PBM's assets. Therefore,
the petitioner bank was not barred from filing a suit
against Ching, as a surety for PBM. An anomalous
situation would arise if individual sureties for debtor
corporations may escape liability by simply co-filing
with the corporation a petition for suspension of
payments in the SEC whose jurisdiction is limited only
to corporations and their corporate assets. [Emphasis
supplied].
Very recently, we reiterated said pronouncements in Modern
Paper Products, Inc., et al. v. Court of Appeals, et al., 33 viz.:
The Court of Appeals was correct in concluding that the
SEC lacked or exceeded its jurisdiction when it included
the Co spouses under a state of suspension of
payments together with MPPI. . . .
It is axiomatic that jurisdiction is conferred by the
Constitution or by law. It is indubitably clear from the
aforequoted Section 5 (d) that only corporations,
partnerships, and associations NOT private
individuals can file with the SEC petitions to be
declared in a state of suspension of payments. It
logically follows that the SEC does not have jurisdiction
to entertain petitions for suspension of payments filed
by parties other than corporations, partnerships or
associations. . . . [Emphasis supplied].
Notwithstanding the foregoing conclusions, this Court, however,
does not subscribe to the theory espoused by petitioner that the
case filed by private respondents should be dismissed outright in
its entirety. The reason is that while it is true that the SEC cannot
acquire jurisdiction over an individual filing a petition for
suspension of payments together with a corporate entity, a closer
scrutiny of Chung Ka Bio and MPPI does not in any manner
suggest, even tangentially, that a petition as the one at bar must
be dismissed likewise with respect to the corporate co-petitioner.
What Chung Ka Bio and MPPI respectively declared was that
"Alfredo Ching, as a mere individual, cannot be allowed as a copetitioner in SEC Case No. 2250" and "respondent Court of
Appeals was correct in ordering the dismissal of the petition for
suspension of payments insofar as the Co spouses were
concerned." [Emphasis supplied].
That the Court never dismissed a petition for suspension of
payments as the ones involved in Chung Ka Bio and MPPI is not
without legal basis. The reason is to be found in Section 1, Rule
XXIII of the REVISED RULES OF PROCEDURE IN THE
SECURITIES AND EXCHANGE COMMISSION (As amended on
April 26, 1993) which was promulgated pursuant to the rulemaking powers vested in the SEC by P.D. No. 902-A, as
amended. It states:
Sec. 1. Provisions of the Rules of Court. The
provisions of the Rules of Court, unless inconsistent,
shall have suppletory effect on those Rules.
(Amended). [Emphasis supplied].
Since we have painstakingly probed said SEC rules but
unearthed nothing that squarely treats of a situation where an
individual and a corporate entity both filed together a petition for
suspension of payments, recourse must then be had to the Rules

of Court which is expressly made suppletory to the SEC rules. In

this regard, we find Section 11, Rule 3 of the 1997 Rules of Civil
Procedure applicable which provides:
Sec. 11. Misjoinder and non-joinder of parties.
Neither misjoinder nor non-joinder of parties is ground
for dismissal of an action. Parties may be dropped or
added by order of the court on motion of any party or on
its own initiative at any stage of the action and on such
terms as are just. Any claim against a misjoined party
may be severed and proceeded with separately. (11a)
[Emphasis supplied]
From the foregoing, it is thus clear that in a case of misjoinder of
parties which in this case is the co-filing of the petition for
suspension of payments by both the Yutingcos and the EYCO
group the remedy has never been to dismiss the petition in its
entirety but to dismiss it only as against the party upon whom the
tribunal or body cannot acquire jurisdiction. The result, therefore,
is that the petition with respect to EYCO shall subsist and may be
validly acted upon by the SEC. The Yutingcos, on the other hand,
shall be dropped from the petition and be required to pursue their
remedies in the regular courts of competent jurisdiction. 34
We are, of course, aware of the argument advanced by petitioner
that the petition should be entirely dismissed and taken out of the
SEC's jurisdiction on account of the alleged insolvency of private
respondents. In this regard, petitioner theorizes that private
respondents have already become insolvent when they allegedly
disposed of a substantial portion of their properties in fraud of
creditors, hence, suspension of payments with the SEC is not the
proper remedy.
Such argument does not persuade us. Petitioner's allegations of
fraudulent dispositions of private respondents' assets and the
supposed insolvency of the latter are hardly of any consequence
to the assumption of jurisdiction by the SEC over the nature or
subject matter of the petition for suspension of payments. Aside
from the fact that these allegations are evidentiary in nature and
still remains to be proved, we have likewise consistently ruled that
what determines the nature of an action, as well as which court or
body has jurisdiction over it, are the allegations of the complaint,
or a petition as in this case, and the character of the relief sought.
35
That the merits of the case after due proceedings are later
found to veer away from the claims asserted by EYCO in its
petition, as when it is shown later that it is actually insolvent and
may not be entitled to suspension of payments, does not divest
the SEC at all of its jurisdiction already acquired at its inception
through the allegations made in the petition.
Neither are we convinced by petitioner's reasoning that the
Yutingcos and the corporate entities making up the EYCO Group,
on
the
basis
of
the
footnote 36 that the former were filing the petition because they
bound themselves as surety to the corporate obligations, should
be considered as mere individuals who should file their petition for
suspension of payments with the regular courts pursuant to
Section 2 of the Insolvency Law. 37 We do not see any legal
ground which should lead one to such conclusion. The doctrine of
piercing the veil of corporate fiction heavily relied upon by
petitioner is entirely misplaced, as said doctrine only applies when
such corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime. 38
II. Non-Exhaustion of Administrative Remedies and ForumShopping

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Equally weak is petitioner's challenge on the Court of Appeals'

decision dismissing its petition for certiorari for failure to exhaust
administrative remedies. Its complaint that the SEC Hearing
Panel was acting without jurisdiction in conducting proceedings
relative to private respondents' petition and for rendering moot
and academic its Motion to Dismiss does not justify the
procedural "short-cut" it took to the appellate court. Basic is the
rule which has been consistently held by this Court in a long line
of cases that "before a party is allowed to seek the intervention of
the court, it is a pre-condition that he should have availed of all
the means of administrative processes afforded him. Hence, if a
remedy within the administrative machinery can still be resorted to
by giving the administrative officer concerned every opportunity to
decide on a matter that comes within his jurisdiction, then such
remedy should be exhausted first before the court's judicial power
can be sought. The premature invocation of court's intervention is
fatal to one's cause of action." 39 That this is the prevailing rule is
aptly explained thus:
The underlying principle of the rule on exhaustion of
administrative remedies rests on the presumption that
the administrative agency, if afforded a complete
chance to pass upon the matter, will decide the same
correctly. There are both legal and practical reasons for
the principle. The administrative process is intended to
provide less expensive and more speedy solutions to
disputes. Where the enabling statute indicates a
procedure for administrative review and provides a
system of administrative appeal or reconsideration, the
courts for reasons of law, comity, and convenience
will not entertain a case unless the available
administrative remedies have been resorted to and the
appropriate authorities have been given an opportunity
to act and correct the errors committed in the
administrative forum. 40
In this case, petitioner was actually not without remedy to correct
what it perceived and supposed was an erroneous assumption of
jurisdiction by the SEC, without having recourse immediately to
the Court of Appeals. Under Section 6 (m) of P.D. No. 902-A, it
has been expressly provided that "the decision, ruling or order of
any such Commissioner, bodies, boards, committees and/or
officer may be appealed to the Commission sitting en banc within
thirty days after receipt by the appellant of notice of such decision,
ruling or order." Such procedure being available, could have been
resorted to by petitioner which, however, it chose to forego.
Furthermore, by taking up the matter with the SEC, it could still
have obtained an injunction which it similarly sought from the
appellate court via its petition for certiorari because the said body
has been empowered by Section 6 (a) of P.D. No. 902-A "to issue
preliminary or permanent injunctions, whether prohibitory or
mandatory, in all cases in which it has jurisdiction . . ." Finally,
petitioner itself hardly concealed the fact that it distrusted
altogether the whole mechanism of appeal to the SEC en banc,
which is why it did not find resort thereto imperative. Thus, it
explicitly stated that "it is a given that SEC will not reverse itself,
therefore, any reconsideration or appeal en banc would be a
mere exercise of futility, [particularly] when public respondent
Associate Commissioner Fe Gloria is the acting Chairperson of
SEC." 41 What basis does petitioner have in casting doubt on the
integrity and competence of the SEC en banc? This baseless,
even reckless, reasoning hardly deserves an iota of attention. It
cannot justify a procedural short-cut quite contrary to law. If this
were so, then the SEC en banc would not have been empowered
at all by the statute to take cognizance of appeals from its
subordinate units. But the lawmakers, having faith in a collegial
body such as the SEC en banc, precisely empowered it to act as
such appellate body. Whatever opinion petitioner entertains with

respect to the SEC's competence cannot override the fact that the
law mandates recourse thereto.
As to the issue of forum-shopping, we fully subscribe to the Court
of Appeals in ruling that such violation existed when it declared:
Finally, the charge that petitioner is guilty of forum
shopping which is the institution of two or more
actions or proceedings grounded on the same cause
cannot unceremoniously be glossed over. It is patent
that the instant petition and the pending motion to
dismiss before the SEC raise identical issues, namely,
lack of jurisdiction and the propriety of the suspension
of payments. 42 [Emphasis supplied].
Actually, even a simple perusal of the pleadings filed by petitioner
before this Court reveals that it has been continuously reiterating
the same arguments that it had earlier raised in its Motion to
Dismiss and in its Petition for Certiorari before the appellate court.
Hence, we do not see why the appellate court's decision on this
aspect should not be sustained.
WHEREFORE, the instant petition is hereby DENIED for lack of
merit. Finding neither reversible error nor grave abuse of
discretion amounting to lack or excess of jurisdiction on the part of
the Court of Appeals, its decision dated December 22, 1997 is
AFFIRMED. Furthermore, the Temporary Restraining Order
(TRO) issued by this Court in its resolution and order of January
6, 1998, is hereby LIFTED and/or DISSOLVED. However, the
Securities and Exchange Commission is directed to drop from the
petition for suspension of payments filed before it the names of
Eulogio O. Yutingco, Caroline Yutingco-Yao, and Theresa T. Lao
without prejudice to their filing a separate petition in the Regional
Trial Courts.
Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-2886

August 22, 1952

GREGORIO ARANETA, INC., plaintiff-appellant,

vs.
PAZ TUASON DE PATERNO and JOSE VIDAL, defendantsappellants.
SYLLABUS
1. CONTRACTS; SALE; MORTGAGE. The proviso in a
contract of sale of real estate that 10 per cent of the purchase
price should be paid only after the mortgage on the property
should have been cancelled, is not onerous or unusual. It was not
onerous or unusual for the vendee to withhold a relatively small
portion of the purchase price before all the impediments to the
final consummation of the sale had been removed.

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CORPORATION LAW | 122

2. ID.; DECEIT IN ITS EXECUTION. A vendor could not be

considered to have been deceived into signing a deed of sale of
real estate, where the circumstances show (1) that she is
intelligent and well educated and had been managing her affairs;
(2) that she had an able attorney who was assisting her in a
lawsuit; and (3) that she has a son who is a leading citizen and a
business man and knew the English language very well if she did
not. If she signed the deed of sale without being apprised of its
import, it can hardly be conceived that she did not have her
attorney or her son, who took active part in the negotiations, read
it to her afterwards.

9. OBLIGATIONS AND CONTRACTS; PAYMENT BY CHECK,

WHICH WERE LOST OR DESTROYED. The stipulation that
the seller "shall not hold the vendee responsible for any loss of
these checks," which were to be void if not presented for payment
at the Bank within 90 days from date of acceptance," was
unconscionable, void and unenforceable in so far as the said
stipulation would stretch the vendors liability for those checks
beyond 90 days. It was not in accord with law, equity or good
conscience to hold a party responsible for something he or she
had no access to and could not make use of but which was under
the absolute control and disposition of the other party.

3. CORPORATIONS; CORPORATE ENTITY. The fiction of

corporate entity of a corporation, which has long been organized
and has engaged in real estate business, will not be disregarded
apart from the members of the corporation, where the corporate
entity was not used to circumvent the law or perpetrate deception
and the disregard of the technicality would pave the way for the
evasion of a legitimate and binding commitment. "The courts will
not ignore the corporate entity in order to further the perpetration
of a fraud." (18 C. J. S., 381.)

10. SALE; LOSS OF THE FUNDS REPRESENTED BY CHECKS

IN PAYMENT; TIME FOR PAYMENT. In adjudging the vendee
to be the party to shoulder the loss of the amount of the check
issued in payment of the obligation, and ordering the vendee to
pay the amount to the vendor, the judgment was not intended to
be in the nature of an extension of time of payment.

4. PRINCIPAL AND AGENT; AGENT, DEFINED; CIVIL CODE,

ARTICLE 1459. An agent, in the sense used in article 1459 of
the Civil Code, is one who accepts anothers representation to
perform in his name certain acts of more or less transcendancy.
(10 Manresa, 46th ed., 100.)
5. ID.; ID; ID. The ban of paragraph 2 of article 1459 connotes
the idea of trust and confidence; and so, where the relationship
does not involve considerations of good faith and integrity, the
prohibition should not, and does not apply. To come under the
prohibition, the agent must be in a fiduciary relation with his
principal.
6. ID.; ID.; ID. A person who acts as a go-between or
middleman between the vendor and the vendee, bringing them
together to make the contract themselves, without any power or
discretion whatsoever which he could abuse to his advantage and
to the owners prejudice, is not an agent within the meaning of
article 1459 of the Civil Code.
7. ATTORNEY AND CLIENT; CIVIL CODE, ARTICLE 1459.
Attorneys are only prohibited from buying their clients property
which is the subject of litigation (Art. 1459, No. 5, Spanish Civil
Code). Where the questioned sale of the property of the client
was effected before the subject thereof became involved in the
present action, the prohibition does not lie.
8. BANKS AND BANKING; CERTIFICATION OF CHECK;
DEPOSIT DURING JAPANESE OCCUPATION NULLITY OF,
UNDER EXECUTIVE ORDER NO. 49. Under banking laws
and practice, by the certification "the funds represented by the
check were transferred from the credit of the maker to that of the
payee or holder, and, for all intents and purposes, the latter
became the depositor of the drawee bank with rights and duties of
one in such relation" ; the transfer of the corresponding funds
from the credit of the depositor to that of the payee had to be coextensive with the life of the checks, which in this case was 90
days. If the checks were not presented for payment within that
period, they became invalid and the funds were automatically
restored to the credit of the drawer though not as a current
deposit but as special deposit. Where the checks were never
collected and the account against which they were drawn was not
used or claimed, and since that account "was opened during the
Japanese occupation and in Japanese currency," the checks
"became obsolete as the account subject thereto is considered
null and void in accordance with Executive Order No. 49 of the
President of the Philippines."cralaw virtua1aw library

11. CONTRACTS AND OBLIGATIONS; RESCISSION; CASUAL

BREACH OF CONTRACT. "The general rule is that recission
will not be permitted for a slight or casual breach of the contract,
but only for such breaches as are so substantial and fundamental
as to defeat the object of the parties." (Song Fo & Co. v.
Hawaiian-Philippine Co., 47 Phil., 821, 827.)
12. ID.; INTEREST, SUSPENSION OF THE RUNNING OF,
ALTHOUGH DEBT HAS NOT BEEN PAID. The matter of the
suspension of the running of interest on the loan is governed by
principles which regard reality rather than technicality, substance
rather than form. Good faith of the offeror or ability to make good
the offer should in simple justice excuse the debtor from paying
interest after the offer was rejected. A debtor cannot be
considered delinquent who offered checks backed by sufficient
deposit or ready to pay cash if the creditor chose that means of
payment. Technical defects of the offer cannot be adduced to
destroy its effects when the objection to accept the payment was
based on entirely different grounds. Thus, although the defective
consignation made by the debtor did not discharge the mortgage
debt, the running of interest on the loan is suspended by the offer
and tender of payment.
13. ID.; DEBT MORATORIUM. The mortgagor is not entitled to
suspension of payment under the debt moratorium law or orders
because the bulk of the debt was a pre-war obligation and the
moratorium order as to such obligation has been repealed except
where the debtor has suffered war damage and has filed claim for
it. Moreover, the debtor herself caused her creditor to be brought
into this case which resulted in the filing of the cross-claim to
foreclose the mortgage.

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CORPORATION LAW | 123

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-47673

October 10, 1946

KOPPEL (PHILIPPINES), INC., plaintiff-appellant,

vs.
ALFREDO L. YATCO, Collector of Internal Revenue,
defendant-appellee.

SYLLABUS
1. CORPORATIONS; DISREGARD OF CORPORATE FICTION.
A corporation will be looked upon as a legal entity as a general
rule, and until sufficient reason to the contrary appears; but, when
the notion of legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, the law will regard
the corporation as an association of persons.
2. ID.; ID.; CONTROL BY ANOTHER CORPORATION. The
corporate entity is disregard where it 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.
3. OBLIGATIONS AND CONTRACTS; SALE PERFECTION OF
CONSENSUAL CONTRACT; LOCATION OF PROPERTY AND
PLACE OF DELIVERY IMMATERIAL; CASE AT BAR. While it
is true that when the contract was perfected in the Philippines the
pair of Atlas-Diesel Marine Engines were in Sweden and the
agreement was to deliver them C. I. F. Hongkong, the contract of
sale being consensual perfected by mere consent (Civil
Code, article 1445; 10 Manresa, 4th ed., p. 11), the location of the
property and the place of delivery did not matter in the question of
where the agreement was perfected.
4. ID.; ID.; PERFECTION OF, WHEN EXECUTED THROUGH
CORRESPONDENCE.

Contracts
executed
through
correspondence are completed from the time an answer is made
accepting the proposition or the conditions by which the latter may
be modified.
5. STATUTORY CONSTRUCTION; INTERPRETATION BY
OFFICERS OF ADMINISTRATIVE BRANCHES NOT BINDING
ON COURTS; "STARE DECISIS" ; CASE AT BAR. The ruling
of the Secretary of Finance, Exhibit M, was not binding upon the
trial court, much less upon this tribunal, since the duty and power
of interpreting the laws is primarily a function of the judiciary.
Plaintiff cannot be excused from abiding by this legal principle,
nor can it properly be heard to say that it relied on the Secretarys
ruling and that, therefore, the courts should not now apply an
interpretation at variance therewith. The rule of stare decisis is
undoubtedly entitled to more respect in the construction of

VOLENTI NON FIT INJURIA

CORPORATION LAW | 124

statutes than the interpretations given by officers of the

administrative branches of the government, even those entrusted
with the administration of particular laws; and yet in Philippine
Trust Co. and Smith, Bell & Co. v. Mitchell (59 Phil., 30), this court
refused to follow its own doctrine laid down in a former case,
saying: "More important than anything else is that the court
should be right."
HILADO, J.:
This is an appeal by Koppel (Philippines), Inc., from the judgment
of the Court of First Instance of Manila in civil case No. 51218 of
said court dismissing said corporation's complaint for the recovery
of the sum of P64,122.51 which it had paid under protest to the
Collector of Internal Revenue on October 30, 1936, as merchant
sales tax. The main facts of the case were stipulated in the court
below as follows:
AGREED STATEMENT OF FACTS
Now come the plaintiff by attorney Eulogio P. Revilla
and the defendant by the Solicitor General and
undersigned Assistant Attorney of the Bureau of Justice
and, with leave of this Honorable Court, hereby
respectfully stipulated and agree to the following facts,
to wit:
I. That plaintiff is a corporation duly organized and
existing under and by virtue of the laws of the
Philippines, with principal office therein at the City of
Manila, the capital stock of which is divided into
thousand (1,000) shares of P100 each. The Koppel
Industrial Car and Equipment company, a corporation
organized and existing under the laws of the State of
Pennsylvania, United States of America, and not
licensed to do business in the Philippines, owned nine
hundred and ninety-five (995) shares out of the total
capital stock of the plaintiff from the year 1928 up to
and including the year 1936, and the remaining five (5)
shares only were and are owned one each by officers
of the plaintiff corporation.
II. That plaintiff, at all times material to this case, was
and now is duly licensed to engage in business as a
merchant and commercial broker in the Philippines; and
was and is the holder of the corresponding merchant's
and commercial broker's privilege tax receipts.
III. That the defendant Collector of Internal revenue is
now Mr. Bibiano L. Meer in lieu of Mr. Alfredo L. Yatco.
IV. That during the period from January 1, 1929, up to
and including December 31, 1932, plaintiff transacted
business in the Philippines in the following manner, with
the exception of the transactions which are described in
paragraphs V and VI of this stipulation:
When a local buyer was interested in the purchase of
railway materials, machinery, and supplies, it asked for
price quotations from plaintiff. Atypical form of such
request is attached hereto and made a part hereof as
Exhibit A. (Exhibit A represents typical transactions
arising from written requests for quotations, while
Exhibits B to G, inclusive, are typical transactions
arising from verbal requests for quotation.) Plaintiff then

cabled for the quotation desired for Koppel Industrial

Car and Equipment Company. A sample of the pertinent
cable is hereto attached and made a part hereof as
Exhibit B. Koppel Industrial Car and Equipment
Company answered by cable quoting its cost price,
usually A. C. I. F. Manila cost price, which was later
followed by a letter of confirmation. A sample of the said
cable quotation and of the letter of confirmation are
hereto attached and made a part hereof as Exhibits C
and C-1. Plaintiff, however, quoted by Koppel Industrial
Car and Equipment Company. Copy of the plaintiff's
letter to purchaser is hereto attached and made a part
hereof as Exhibit D. On the basis of these quotations,
orders were placed by the local purchasers, copies of
which orders are hereto attached as Exhibits E and E-1.
A cable was then sent to Koppel Industrial Car and
Equipment company giving instructions to ship the
merchandise to Manila forwarding the customer's order.
Sample of said cable is hereto attached as Exhibit F.
The bills of lading were usually made to "order" and
indorsed in blank with notation to the effect that the
buyer be notified of the shipment of the goods covered
in the bills of lading; commercial invoices were issued
by Koppel Industrial Car and Equipment Company in
the names of the purchasers and certificates of
insurance were likewise issued in their names, or in the
name of Koppel Industrial Car and Equipment
Company but indorsed in blank and attached to drafts
drawn by Koppel Industrial Car and Equipment
Company on the purchasers, which were forwarded
through foreign banks to local banks. Samples of the
bills of lading are hereto attached as Exhibits F-1, I-1, I2 and I-3. Bills of ladings, Exhibits I-1, I-2 and I-3, may
equally have been employed, but said Exhibits I-1, I-2
and I-3 have no connection with the transaction
covered by Exhibits B to G, inclusive. The purchasers
secured the shipping papers by arrangement with the
banks, and thereupon received and cleared the
shipments. If the merchandise were of European origin,
and if there was not sufficient time to forward the
documents necessary for clearance, through foreign
banks to local banks, to the purchasers, the Koppel
Industrial Car and Equipment company did, in many
cases, send the documents directly from Europe to
plaintiff with instructions to turn these documents over
to the purchasers. In many cases, where sales was
effected on the basis of C. I. F. Manila, duty paid,
plaintiff advanced the sums required for the payment of
the duty, and these sums, so advanced, were in every
case reimbursed to plaintiff by Koppel Industrial Car
and Equipment Company. The price were payable by
drafts agreed upon in each case and drawn by Koppel
Industrial Car and Equipment Company on respective
purchasers through local banks, and payments were
made to the banks by the purchasers on presentation
and delivery to them of the above-mentioned shipping
documents or copies thereof. A sample of said drafts is
hereto attached as Exhibit G. Plaintiff received by way
of compensation a percentage of the profits realized on
the above transactions as fixed in paragraph 6 of the
plaintiff's contract with Koppel Industrial Car and
Equipment Company, which contract is hereto attached
as Exhibit H, and suffered its corresponding share in
the losses resulting from some of the transactions.
That the total gross sales from January 1, 1929, up to
and including December 31, 1932, effected in the

VOLENTI NON FIT INJURIA

CORPORATION LAW | 125

foregoing manner and under the above specified

conditions, amount to P3, 596,438.84.
V. That when a local sugar central was interested in the
purchase of railway materials, machinery and supplies,
it secured quotations from, and placed the
corresponding orders with, the plaintiff in substantially
the same manner as outlined in paragraph IV of this
stipulation, with the only difference that the purchase
orders which were agreed to by the central and the
plaintiff are similar to the sample hereto attached and
made a part hereof as Exhibit I. Typical samples of the
bills of lading covering the herein transaction are hereto
attached and made a part hereto as Exhibits I-1, I-2 and
I-3. The value of the sales carried out in the manner
mentioned in this paragraph is P133,964.98.
VI. That sometime in February, 1929, Miguel J. Ossorio,
of Manila, Philippines, placed an option with Koppel
Industrial Car and Equipment Company, through
plaintiff, to purchase within three months a pair of AtlasDiesel Marine Engines. Koppel Industrial Car and
Equipment Company purchased said Diesel Engines in
Stockholm, Sweden, for $16,508.32. The suppliers
drew a draft for the amount of $16,508.32 on the
Koppel Industrial Car and Equipment Company, which
paid the amount covered by the draft. Later, Miguel J.
Ossorio definitely called the deal off, and as Koppel
Industrial Car and Equipment Company could not ship
to or draw on said Mr. Miguel J. Ossorio, it in turn drew
another draft on plaintiff for the same amount at six
months sight, with the understanding that Koppel
Industrial Car and Equipment Company would
reimburse plaintiff when said engines were disposed of.
Plaintiff honored the draft and debited the said sum of
$16,508.32 to merchandise account. The engines were
left stored at Stockholm, Sweden. On April 1, 1930, a
new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines,
was found and the same engines were sold to him for
$21,000 (P42,000) C. I. F. Hongkong. The engines
were shipped to Hongkong and a draft for $21,000 was
drawn by Koppel Industrial Car and Equipment
Company on Mr. Cesar Barrios. After the draft was fully
paid by Mr. Barrios, Koppel Industrial Car and
Equipment Company reimbursed plaintiff with cost price
of $16,508.32 and credited it with $1,152.95 as its
share of the profit on the transaction. Exhibits J and J-1
are herewith attached and made integral parts of this
stipulation with particular reference to paragraph VI
hereof.
VII. That plaintiff's share in the profits realized out of
these transactions described in paragraphs IV, V and VI
hereof
totaling
P3,772,403.82,
amounts
to
P132,201.30; and that plaintiff within the time provided
by law returned the aforesaid amount P132,201.30 for
the purpose of the commercial broker's 4 per cent tax
and paid thereon the sum P5,288.05 as such tax.
VIII. That defendant demanded of the plaintiff the sum
of P64,122.51 as the merchants' sales tax of 1% per
cent on the amount of P3,772,403.82, representing the
total gross value of the sales mentioned in paragraphs
IV, V and VI hereof, including the 25 per cent surcharge
for the late payment of the said tax, which tax and
surcharge were determined after the amount of
P5,288.05 mentioned in paragraph VI hereof was
deducted.

IX. That plaintiff, on October 30, 1936, paid under

protest said sum of P64,122.51 in order to avoid further
penalties, levy and distraint proceedings.
X. That defendant, on November 10, 1936, overruled
plaintiff's protest, and defendant has failed and refused
and still fails and refuses, notwithstanding demands by
plaintiff, to return to the plaintiff said sum of P64,122.51
or any part thereof.
xxx

xxx

xxx

That the parties hereby reserve the right to

present additional evidence in support of their
respective contentions.
Manila, Philippines, December 26, 1939
(Sgd.) ROMAN
Solicitor General

OZAETA

(Sgd.) ANTONIO CAIZARES

Assistant Attorney
(Sgd.) E. P. REVILLA
Attorney for the Plaintiff
3rd Floor, Perez Samanillo Bldg., Manila

Both parties adduced some oral evidence in clarification

of or addition to their agreed statement of facts. A
preponderance of evidence has established, besides
the facts thus stipulated, the following:
(a) The shares of stock of plaintiff corporation
were and are all owned by Koppel Industries
Car
and
Equipment
Company
of
Pennsylvania, U. S. A., exceptive which were
necessary to qualify the Board of Directors of
said plaintiff corporation;
(b) In the transactions involved herein the
plaintiff
corporation
acted
as
the
representative of Koppel Industrial Car and
Equipment Company only, and not as the
agent of both the latter company and the
respective local purchasers plaintiff's
principal witness, A.H. Bishop, its resident
Vice-President, in his testimony invariably
referred to Koppel Industrial Car and
Equipment Co. as "our principal" 9 t. s. n., pp.
10, 11, 12, 19, 75), except that at the bottom
of page 10 to the top of page 11, the witness
stated that they had "several principal"
abroad but that "our principal abroad was, for
the years in question, Koppel Industrial Car
and Equipment Company," and on page 68,
he testified that what he actually said was
". . . but our principal abroad" and not "our
principal abroad" as to which it is very
significant that neither this witness nor any
other gave the name of even a single other
principal abroad of the plaintiff corporation;

VOLENTI NON FIT INJURIA

CORPORATION LAW | 126

(c) The plaintiff corporation bore alone

incidental expenses as, for instance, cable
expenses-not only those of its own cables but
also those of its "principal" (t.s.n., pp. 52, 53);
(d) the plaintiff's "share in the profits" realized
from the transactions in which it intervened
was left virtually in the hands of Koppel
Industrial Car and Equipment Company
(t.s.n., p. 51);
(e) Where drafts were not paid by the
purchasers, the local banks were instructed
not to protest them but to refer them to
plaintiff which was fully empowered by
Koppel Industrial Car and Equipment
company to instruct the banks with regards to
disposition of the drafts and documents
(t.s.n., p. 50; Exhibit G);lawphil.net
(f) Where the goods were European origin,
consular invoices, bill of lading, and, in
general, the documents necessary for
clearance were sent directly to plaintiff (t.s.n.,
p. 14);
(g) If the plaintiff had in stock the
merchandise desired by local buyers, it
immediately filled the orders of such local
buyers and made delivery in the Philippines
without the necessity of cabling its principal in
America either for price quotations or
confirmation or rejection of that agreed upon
between it and the buyer (t.s.n., pp. 39-43);
(h) Whenever the deliveries made by Koppel
Industrial Car and Equipment Company were
incomplete or insufficient to fill the local
buyer's orders, plaintiff used to make good
the deficiencies by deliveries from its own
local stock, but in such cases it charged its
principal only the actual cost of the
merchandise thus delivered by it from its
stock and in such transactions plaintiff did not
realize any profit (t.s.n., pp. 53-54);
(i) The contract of sale involved herein were
all perfected in the Philippines.
Those described in paragraph IV of the agreed
statement of facts went through the following process:
(1) "When a local buyer was interested in the purchase
of railway materials, machinery, and supplies, it asked
for price quotations from plaintiff"; (2) "Plaintiff then
cabled for the quotation desired from Koppel Industrial
Car and Equipment Company"; (3) "Plaintiff, however,
quoted to the purchaser a selling price above the
figures quoted by Koppel Industrial Car and Equipment
Company"; (4) "On the basis of these quotations,
orders were placed by the local purchasers . . ."
Those described in paragraph V of said agreed
statement of facts were transacted "in substantially the
same manner as outlined in paragraph IV."

As to the single transaction described in paragraph VI

of the same agreed statement of facts, discarding the
Ossorio option which anyway was called off, "On April
1, 1930, a new local buyer, Mr. Cesar Barrios, of Iloilo,
Philippines, was found and the same engines were sold
to him for $21,000(P42,000) C.I.F. Hongkong."
(Emphasis supplied.).
(j) Exhibit H contains the following paragraph:
It is clearly understood that the intent of this contract is
that the broker shall perform only the functions of a
broker as set forth above, and shall not take possession
of any of the materials or equipment applying to said
orders or perform any acts or duties outside the scope
of a broker; and in no sense shall this contract be
construed as granting to the broker the power to
represent the principal as its agent or to make
commitments on its behalf.
The Court of First Instance held for the defendant and dismissed
plaintiff's complaint with costs to it.
Upon this appeal, seven errors are assigned to said judgment as
follows:.
1. That the court a quo erred in not holding that
appellant is a domestic corporation distinct and
separate from, and not a mere branch of Koppel
Industrial Car and Equipment Co.;
2. the court a quo erred in ignoring the ruling of the
Secretary of Finance, dated January 31, 1931, Exhibit
M;
3. the court a quo erred in not holding that a character
of a broker is determined by the nature of the
transaction and not by the basis or measure of his
compensation;
4. The court a quo erred in not holding that appellant
acted as a commercial broker in the transactions
covered under paragraph VI of the agreed statement of
facts;
5. The court a quo erred in not holding that appellant
acted as a commercial broker in the transactions
covered under paragraph v of the agreed statement of
facts;
6. The court a quo erred in not holding that appellant
acted as a commercial broker in the sole transaction
covered under paragraph VI of the agreed statement of
facts;
7. the court a quo erred in dismissing appellant's
complaint.
The lower court found and held that Koppel (Philippines), Inc. is a
mere dummy or brach ("hechura") of Koppel industrial Car and
Equipment Company. The lower court did not deny legal
personality to Koppel (Philippines), Inc. for any and all purposes,
but in effect its conclusion was that, in the transactions involved
herein, the public interest and convenience would be defeated

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and what would amount to a tax evasion perpetrated, unless

resort is had to the doctrine of "disregard of the corporate fiction."
I. In its first assignment of error appellant submits that the trial
court erred in not holding that it is a domestic corporation distinct
and separate from and not a mere branch of Koppel Industrial Car
and Equipment Company. It contends that its corporate existence
as Philippine corporation can not be collaterally attacked and that
the Government is estopped from so doing. As stated above, the
lower court did not deny legal personality to appellant for any and
all purposes, but held in effect that in the transaction involved in
this case the public interest and convenience would be defeated
and what would amount to a tax evasion perpetrated, unless
resort is had to the doctrine of "disregard of the corporate fiction."
In other words, in looking through the corporate form to the
ultimate person or corporation behind that form, in the particular
transactions which were involved in the case submitted to its
determination and judgment, the court did so in order to prevent
the contravention of the local internal revenue laws, and the
perpetration of what would amount to a tax evasion, inasmuch as
it considered and in our opinion, correctly that appellant
Koppel (Philippines), Inc. was a mere branch or agency or dummy
("hechura") of Koppel Industrial Car and Equipment Co. The court
did not hold that the corporate personality of Koppel (Philippines),
Inc., would also be disregarded in other cases or for other
purposes. It would have had no power to so hold. The courts'
action in this regard must be confined to the transactions involved
in the case at bar "for the purpose of adjudging the rights and
liabilities of the parties in the case. They have no jurisdiction to do
more." (1 Flethcer, Cyclopedia of Corporation, Permanent ed., p.
124, section 41.)
A leading and much cited case puts it as follows:
If any general rule can be laid down, in the present
state of authority, it is that a corporation will be looked
upon as a legal entity as a general rule, and until
sufficient reason to the contrary appears; but, when the
notion of legal entity is used to defeat public
convinience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an
association of persons. (1 Fletcher Cyclopedia of
Corporation [Permanent Edition], pp. 135, 136; United
States vs. Milwaukee Refrigeration Transit Co., 142
Fed., 247, 255, per Sanborn, J.)
In his second special defense appellee alleges "that the plaintiff
was and is in fact a branch or subsidiary of Koppel Industrial Car
and Equipment Co., a Pennsylvania corporation not licensed to
do business in the Philippines but actually doing business here
through the plaintiff; that the said foreign corporation holds 995 of
the 1,000 shares of the plaintiff's capital stock, the remaining five
shares being held by the officers of the plaintiff herein in order to
permit the incorporation thereof and to enable its aforesaid
officers to act as directors of the plaintiff corporation; and that
plaintiff was organized as a Philippine corporation for the purpose
of evading the payment by its parent foreign corporation of
merchants' sales tax on the transactions involved in this case and
others of similar nature."
By most courts the entity is normally regarded but is
disregarded to prevent injustice, or the distortion or
hiding of the truth, or to let in a just defense. (1 Fletcher,
Cyclopedia of Corporation, Permanent Edition, pp.
139,140; emphasis supplied.)

Another rule is that, when the corporation is the mere

alter ego, or business conduit of a person, it may de
disregarded." (1 Fletcher, Cyclopedia of Corporation,
Permanent Edition, p. 136.)
Manifestly, the principle is the same whether the "person" be
natural or artificial.
A very numerous and growing class of cases wherein
the corporate entity is disregarded is that (it 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)." (1
Fletcher, Cyclopedia of Corporation, Permanent ed., pp.
154, 155.)
While we recognize the legal principle that a
corporation does not lose its entity by the ownership of
the bulk or even the whole of its stock, by another
corporation (Monongahela Co. vs. Pittsburg Co., 196
Pa., 25; 46 Atl., 99; 79 Am. St. Rep., 685) yet it is
equally well settled and ignore corporate forms."
(Colonial Trust Co. vs. Montello Brick Works, 172 Fed.,
310.)
Where it appears that 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 persons, disregard the legal fiction that
two corporations are distinct entities, and treat them as
identical. (Abney vs. Belmont Country Club Properties,
Inc., 279 Pac., 829.)
. . . the legal fiction of distinct corporate existence will
be disregarded in a case where a corporation is so
organized and controlled and its affairs are so
conducted, as to make it merely an instrumentality or
adjunct of another corporation. (Hanter vs. Baker Motor
Vehicle Co., 190 Fed., 665.)
In United States vs. Lehigh Valley R. Co. 9220 U.S., 257; 55 Law.
ed., 458, 464), the Supreme Court of the United States
disregarded the artificial personality of the subsidiary coal
company in order to avoid that the parent corporation, the Lehigh
Valley R. Co., should be able, through the fiction of that
personality, to evade the prohibition of the Hepburn Act against
the transportation by railroad companies of the articles and
commodities described therein.
Chief Justice White, speaking for the court, said:
. . . Coming to discharge this duty it follows, in view of
the express prohibitions of the commodities clause, it
must be held that while the right of a railroad company
as a stockholder to use its stock ownership for the
purpose of a bona fide separate administration of the
affairs of a corporation in which it has a stock interest
may not be denied, the use of such stock ownership in
substance for the purpose of destroying the entity of a
producing, etc., corporation, and commingling its affairs
in administration with the affairs of the railroad
company, so as to make the two corporations virtually
one, brings the railroad company so voluntarily acting
as to such producing, etc., corporation within the
prohibitions of the commodities clause. In other words,
that by operation and effect of the commodities clause

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there is duty cast upon a railroad company proposing to

carry in interstate commerce the product of a
producing, etc., corporation in which it has a stock
interest, not to abuse such power so as virtually to do
by indirection that which the commodities clause
prohibits, a duty which plainly would be violated by
the unnecessary commingling of the affairs of the
producing company with its own, so as to cause them
to be one and inseparable.
Corrobarative authorities can be cited in support of the same
proposition, which we deem unnecessary to mention here.
From the facts hereinabove stated, as established by a
preponderance of the evidence , particularly those narrated in
paragraph (a), (b), (c), (d), (e),(f), (h), (i), and (j) after the agreed
statement of facts, we find that, in so far as the sales involved
herein are concerned, Koppel (Philippines), Inc., and Koppel
Industrial Car and Equipment company are to all intents and
purposes one and the same; or, to use another mode of
expression, that, as regards those transactions, the former
corporation is a mere branch, subsidiary or agency of the latter.
To our mind, this is conclusively borne out by the fact, among
others, that the amount of he so-called "share in the profits" of
Koppel (Philippines), Inc., was ultimately left to the sole, unbridled
control of Koppel Industrial Car and Equipment Company. If, in
their relations with each other, Koppel (Philippines), Inc., was
considered and intended to function as a bona fide separate
corporation, we can not conceive how this arrangement could
have been adopted, for if there was any factor in its business as
to which it would in that case naturally have been opposed to
being thus controlled, it must have been precisely the amount of
profit which it could endeavor and hope to earn. No group of
businessmen could be expected to organize a mercantile
corporation the ultimate end of which could only be profit if
the amount of that profit were to be subjected to such a unilateral
control of another corporation, unless indeed the former has
previously been designed by the incorporators to serve as a mere
subsidiary, branch or agency of the latter. Evidently, Koppel
Industrial Car and Equipment Company made us of its ownership
of the overwhelming majority 99.5% of the capital stock of
the local corporation to control the operations of the latter to such
an extent that it had the final say even as to how much should be
allotted to said local entity in the so-called sharing in the profits.
We can not overlook the fact that in the practical working of
corporate organizations of the class to which these two entities
belong, the holder or holders of the controlling part of the capital
stock of the corporation, particularly where the control is
determined by the virtual ownership of the totality of the shares,
dominate not only the selection of the Board of Directors but,
more often than not, also the action of that Board. Applying this to
the instant case, we can not conceive how the Philippine
corporation could effectively go against the policies, decisions,
and desires of the American corporation with regards to the
scheme which was devised through the instrumentality of the
contract Exhibit H, as well as all the other details of the system
which was adopted in order to avoid paying the 1 per cent
merchants sales tax. Neither can we conceive how the Philippine
corporation could avoid following the directions of the American
corporation held 99.5 per cent of the capital stock of the Philippine
corporation. In the present instance, we note that Koppel
(Philippines), Inc., was represented in the Philippines by its
"resident Vice-President." This fact necessarily leads to the
inference that the corporation had at least a Vice-President, and
presumably also a President, who were not resident in the
Philippines but in America, where the parent corporation is
domiciled. If Koppel (Philippines), Inc., had been intended to
operate as a regular domestic corporation in the Philippines,
where it was formed, the record and the evidence do not disclose

any reason why all its officers should not reside and perform their
functions in the Philippines.
Other facts appearing from the evidence, and presently to be
stated, strengthen our conclusion, because they can only be
explained if the local entity is considered as a mere subsidiary,
branch or agency of the parent organization. Plaintiff charged the
parent corporation no more than actual cost without profit
whatsoever for merchandise allegedly of its own to complete
deficiencies of shipments made by said parent corporation (t.s.n.,
pp. 53, 54) a fact which could not conceivably have been the
case if plaintiff had acted in such transactions as an entirely
independent entity doing business for profit, of course with
the American concern. There has been no attempt even to
explain, if the latter situation really obtained, why these two
corporations should have thus departed from the ordinary course
of business. Plaintiff was charged by the American corporation
with the cost even of the latter's cable quotations from ought
that appears from the evidence, this can only be comprehended
by considering plaintiff as such a subsidiary, branch or agency of
the parent entity, in which case it would be perfectly
understandable that for convenient accounting purposes and the
easy determination of the profits or losses of the parent
corporation's Philippines should be charged against the Philippine
office and set off against its receipts, thus separating the accounts
of said branch from those which the central organization might
have in other countries. The reference to plaintiff by local banks,
under a standing instruction of the parent corporation, of unpaid
drafts drawn on Philippine customers by said parent corporation,
whenever said customers dishonored the drafts, and the fact that
the American corporation had previously advised said banks that
plaintiff in those cases was "fully empowered to instruct (the
banks) with regard to the disposition of the drafts and documents"
(t.s.n., p. 50), in the absence of any other satisfactory explanation
naturally give rise to the inference that plaintiff was a subsidiary,
branch or agency of the American concern, rather than an
independent corporation acting as a broker. For, without such
positive explanation, this delegation of power is indicative of the
relations between central and branch offices of the same
business enterprise, with the latter acting under instructions
already given by the former. Far from disclosing a real separation
between the two entities, particularly in regard to the transactions
in question, the evidence reveals such commongling and
interlacing of their activities as to render even incomprehensible
certain accounting operations between them, except upon the
basis that the Philippine corporation was to all intents and
purposes a mere subsidiary, branch, or agency of the American
parent entity. Only upon this basis can it be comprehended why it
seems not to matter at all how much profit would be allocated to
plaintiff, or even that no profit at all be so allocated to it, at any
given time or after any given period.
As already stated above, under the evidence the sales in the
Philippines of the railway materials, machinery and supplies
imported here by Koppel Industrial Car and Equipment Company
could have been as conviniently and efficiently transacted and
handled if not more so had said corporation merely
established a branch or agency in the Philippines and obtained
license to do business locally; and if it had done so and said sales
had been effected by such branch or agency, there seems to be
no dispute that the 1 per cent merchants' sales tax then in force
would have been collectible. So far as we can discover, there
would be only one, but very important, difference between the two
schemes a difference in tax liability on the ground that the
sales were made through another and distinct corporation, as
alleged broker, when we have seen that this latter corporation is
virtually owned by the former, or that they practically one and the
same, is to sanction a circumvention of our tax laws, and permit a
tax evasion of no mean proportions and the consequent

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commission of a grave injustice to the Government. Not only this;

it would allow the taxpayer to do by indirection what the tax laws
prohibited to be done directly (non-payment of legitimate taxes),
paraphrasing the United States Supreme Court in United States
vs. Lehigh Valley R. Co., supra.
The act of one corporation crediting or debiting the other for
certain items, expenses or even merchandise sold or disposed of,
is perfectly compatible with the idea of the domestic entity being
or acting as a mere branch, agency or subsidiary of the parent
organization. Such operations were called for any way by the
exigencies or convenience of the entire business. Indeed,
accounting operation such as these are invitable, and have to be
effected in the ordinary course of business enterprise extends its
trade to another land through a branch office, or through another
scheme amounting to the same thing.
If plaintiff were to act as broker in the Philippines for any other
corporation, entity or person, distinct from Koppel Industrial Car
and Equipment company, an entirely different question will arise,
which, however, we are not called upon, nor in a position, to
decide.
As stated above, Exhibit H contains to the following paragraph:
It is clearly understood that the intent of this contract is
that the broker shall perform only the functions of a
broker as set forth above, and shall not take possession
of any of the materials or equipment applying to said
orders or perform any acts or duties outside the scope
of a broker; and in no sense shall this contract be
construed as granting to the broker the power to
represent the principal as its agent or to make
commitments on its behalf.
The foregoing paragraph, construed in the light of other facts
noted elsewhere in this decision, betrays, we think a deliberate
intent, through the medium of a scheme devised with great care,
to avoid the payment of precisely the 1 per cent merchants'
sales tax in force in the Philippines before, at the time of, and
after, the making of the said contract Exhibit H. If this were to be
allowed, the payment of a tax, which directly could not have been
avoided, could be evaded by indirection, consideration being had
of the aforementioned peculiar relations between the said
American and local corporations. Such evasion, involving as it
would, a violation of the former Internal Revenue Law, would even
fall within the penal sanction of section 2741 of the Revised
Administrative Code. Which only goes to show the illegality of the
whole scheme. We are not here concerned with the impossibility
of collecting the merchants' sales tax, as a mere incidental
consequence of transactions legal in themselves and innocent in
their purpose. We are dealing with a scheme the primary, not to
say the sole, object of which the evasion of the payment of such
tax. It is this aim of the scheme that makes it illegal.
We have said above that the contracts of sale involved herein
were all perfected in the Philippines. From the facts stipulated in
paragraph IV of the agreed statement of facts, it clearly appears
that the Philippine purchasers had to wait for Koppel Industrial
Car and Equipment Company to communicate its cost prices to
Koppel (Philippines), Inc., were perfected in the Philippines. In
those cases where no such price quotations from the American
corporation were needed, of course, the sales effected in those
cases described in paragraph V of the agreed statement of facts
were, as expressed therein, transacted "in substantially the same
manner as outlined in paragraph VI." Even the single transaction
described in paragraph VI of the agreed statement of facts was

also perfected in the Philippines, because the contracting parties

were here and the consent of each was given here. While it is true
that when the contract was thus perfected in the Philippines the
pair of Atlas-Diesel Marine Engines were in Sweden and the
agreement was to deliver them C.I.F. Hongkong, the contract of
sale being consensual perfected by mere consent (Civil
Code, article 1445; 10 Manresa, 4th ed., p. 11), the location of the
property and the place of delivery did not matter in the question of
where the agreement was perfected.
In said paragraph VI, we read the following, as indicating where
the contract was perfected, considering beforehand that one
party, Koppel (Philippines),Inc., which in contemplation of law, as
to that transaction, was the same Koppel Industrial Car
Equipment Co., was in the Philippines:
. . . on April 1, 1930, a new local buyer Mr. Cesar
Barrios, of Iloilo, Philippines, was found and the same
engines were sold to him for $21,000 (P42,000) C.I.F.
Hongkong . . . (Emphasis supplied.)
Under the revenue law in force when the sales in question took
place, the merchants' sales tax attached upon the happening of
the respective sales of the "commodities, goods, wares, and
merchandise" involved, and we are clearly of opinion that such
"sales" took place upon the perfection of the corresponding
contracts. If such perfection took place in the Philippines, the
merchants' sales tax then in force here attached to the
transactions.
Even if we should consider that the Philippine buyers in the cases
covered by paragraph IV and V of the agreed statement of facts,
contracted with Koppel Industrial Car and Equipment company,
we will arrive at the same final result. It can not be denied in that
case that said American corporation contracted through Koppel
(Philippines), Inc., which was in the Philippines. The real
transaction in each case of sale, in final effect, began with an offer
of sale from the seller, said American corporation, through its
agent, the local corporation, of the railway materials, machinery,
and supplies at the prices quoted, and perfected or completed by
the acceptance of that offer by the local buyers when the latter,
accepting those prices, placed their orders. The offer could not
correctly be said to have been made by the local buyers when
they asked for price quotations, for they could not rationally be
taken to have bound themselves to buy before knowing the
prices. And even if we should take into consideration the fact that
the american corporation contracted, at least partly, through
correspondence, according to article 54 of the Code of
Commerce, the respective contracts were completed from the
time of the acceptance by the local buyers, which happened in the
Philippines.
Contracts executed through correspondence shall be
completed from the time an answer is made accepting
the proposition or the conditions by which the latter may
be modified." (Code of Commerce, article 54; emphasis
supplied.)
A contract is as a rule considered as entered into at the
place where the place it is performed. So where
delivery is regarded as made at the place of delivery."
(13 C. J., 580-81, section 581.)
(In the consensual contract of sale delivery is not
needed for its perfection.)

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CORPORATION LAW | 130

II. Appellant's second assignment of error can be summarily

disposed of. It is clear that the ruling of the Secretary of Finance,
Exhibit M, was not binding upon the trial court, much less upon
this tribunal, since the duty and power of interpreting the laws is
primarily a function of the judiciary. (Ortua vs. Singson
Encarnacion, 59 Phil., 440, 444.) Plaintiff cannot be excused from
abiding by this legal principle, nor can it properly be heard to say
that it relied on the Secretary's ruling and that, therefore, the
courts should not now apply an interpretation at variance
therewith. The rule of stare decisis is undoubtedly entitled to more
respect in the construction of statutes than the interpretations
given by officers of the administrative branches of the
government, even those entrusted with the administration of
particular laws. But this court, in Philippine Trust Company and
Smith, Bell and Co. vs. Mitchell(59 Phil., 30, 36), said:
. . . The rule of stare decisis is entitled to respect.
Stability in the law, particularly in the business field, is
desirable. But idolatrous reverence for precedent,
simply as precedent, no longer rules. More important
than anything else is that court should be right. . . .
III. In the view we take of the case, and after the disposition made
above of the first assignment of error, it becomes unnecessary to
make any specific ruling on the third, fourth, fifth, sixth, and
seventh assignments of error, all of which are necessarily
disposed of adversely to appellant's contention.
Wherefore, he judgment appealed from is affirmed, with costs of
both instances against appellant. So ordered.
Moran, C.J., Paras, Feria, Pablo, Bengzon, Briones, and Tuason,
JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-13119

September 22, 1959

RICARDO TANTONGCO, petitioner,

vs.
KAISAHAN NG MGA MANGGAGAWA SA LA CAMPAN (KKM)
AND THE HONORABLE COURT OF INDUSTRIAL RELATIONS,
respondents.
SYLLABUS

1. CORPORATIONS; DISTINCT PERSONALITY OF A

CORPORATION; JURISDICTION OF COURT OF INDUSTRIAL
RELATIONS NOT AFFECTED BY DEATH OF OWNER. The
death of an owner and manager of a corporation, against which
cases are pending in the Court of Industrial relations, does not
deprive the latter of its jurisdiction over the same. The party in
those cases being the corporation and not the owner or manager
personally, the claims of the laborers therein, which are merely
incidental to their demands for reinstatement for having been
unjustly dismissed, and for better working conditions, are not the
claims contemplated by law to be submitted before the
administrator of the estate of a deceased person.
2. ID.; EXISTENCE AND OPERATION; ESTOPPEL. Having
admitted the existence and operation of the two entities in a
complaint filed for injunction by the said entities and on two other
occasions, Petitioner, who is now estopped from denying the
existence of the same.
3. COURT OF INDUSTRIAL RELATIONS; POWER TO
ENFORCE ORDERS; CONTEMPT. Petitioners contention that
after he ceased to be administrator of the estate of the deceased
owner and manager of the entities in question, he cannot now be
compelled to comply with the order of the Court of Industrial
Relations to appear in the contempt proceedings instituted
against him is untenable. The jurisdiction and authority of said
court as to compliance with and violations of its orders are clearly
defined in section 6 of Commonwealth Act No. 143.
MONTEMAYOR, J.:
This is a petition for certiorari and prohibition with prayer for
issuance of a writ of preliminary injunction to prohibit respondent
Court of Industrial Relations from proceeding with the hearing of
the contempt proceedings for which petitioner Ricardo Tantongco
was cited to appear the present his evidence. The contempt
proceedings which petitioner seeks to stop are based on the order
of the Court of Industrial Relations, dated September 30, 1957,
which reads as follows:

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CORPORATION LAW | 131

It appearing that the Order of this Court, in the aboveentitled case, dated February 18, 1957 (folios 134-166),
has become final and executory and the respondents
have failed to comply with the same, the said
respondents, namely, the La Campana Starch and
Coffee Factory or its manager or the person who has
charge of the management, and the administrator of the
Estate of Ramon Tantongco are hereby ordered to
comply with said order, within five days from receipt
hereof, particularly the following, to wit:
(a) To reinstate the persons named in the
said Order of February 18, 1957;
(b) To deposit the amount of P65,534.01 with
this Court.
With respect to possible back wages from August 28,
1957 as mentioned in the petition for contempt of
August 30, 1957, the same shall first be determined.
Failure to comply with this Order shall be directly dealt
with accordingly.
It would appear that petitioner Ricardo Tantongco failed to comply
with said order and so, as already stated, he was cited to appear
and to adduce evidence on his behalf to show why he should not
be punished for indirect contempt.
The facts in this case may be briefly narrated thus: Sometime in
June, 1951, members of the Kaisahan ng mga Manggagawa sa
La Campana, a labor union to which were affiliated workers in the
La Campana Starch Factory and La Campana Coffee Factory,
two separate entities but under the one management, presented
demands for higher wages, and more privileges and benefits in
connection with their work. When the management failed and
refused to grant the demands, the Department of Labor
intervened; but failing to settle the controversy, it certified the
dispute to the Court of Industrial Relations on July 17, 1951,
where it was docketed as Case No. 584V. On the theory that the
laborers presenting the demands were only the ones working in
the coffee factory, said company filed through the management a
motion to dismiss claiming that inasmuch as there were only 14 of
them in said factory, the Court of Industrial Relations had no
jurisdiction to entertain and decide the case. The motion was
denied by the Court of Industrial Relations, which said:
. . . There was only management for the business of
gawgaw and coffee with whom the laborers are dealing
regarding their work. Hence, the filing of action against
the La Campana Starch and Coffee Factory is proper
and justified.1wphl.nt
The order of denial was appealed to this Tribunal through
certiorari under G.R. No. L-5677. In disposing of the case, we
held:
As to the first ground, petitioners obviously do not
question the fact that the number of employees of the
La Campana Gaugau Packing involved in the case is
more than the jurisdictional number (31) required by
law, but they contend that the industrial court has no
jurisdiction to try case against La Campana Coffee
Factory Co. Inc. because the latter has allegedly only
14 laborers and only five of these are members of

respondent Kaisahan. This contention loses force when

it is noted that, as found by the industrial court and
this finding is conclusive upon us La Campana
Gaugau Packing and La Campana Coffee Factory Co.
Inc., are operating under one single management, that
is, one business though with two trade names. True, the
coffee factory is a corporation , and, by legal fiction, an
entity existing separate and part from the persons
composing it, that is, Tan Tong and his family. But is
settled this fiction of law, which has been introduced as
a matter of convenience and to subserve the ends of
justice cannot be invoke to further an end subversive of
that purpose.
... The attempt to make the two factories appear as two
separate business, when in reality, they are but one is
but a device to defeat the ends of the law (the Act
governing capital and labor relations) and should not be
permitted to prevail. (La Campana Coffee Factory, et
al., vs. Kaisahan ng mga Manggagawa, etc. et al., 93
Phil., 160; 49 Off. Gaz., [6] 2300.)
Upon the return of the case to the Court of Industrial Relations,
the latter proceeded with the hearing. In the meantime incidental
cases involving the same parties came up and were filed before
the Court of Industrial Relations in the following
cases:1wphl.nt
Case No. 584-V(1) petition for contempt against the
La Campana Starch and Coffee Factory for having
employed 21 new laborers in violation of the order of
July 21, 1951, filed on July 25, 1951;
Case No. 584-V(2) petition of La Campana for
authority for authority to dismiss Loreto Bernabe, filed
on July 25, 19651;
Case No. 584-V(3) petition of Union to reinstate
Bonifacio Calderon with backpay, filed on August 3,
1951;
Case No. 584-V(5) petition of Union to reinstate
Marcelo Estrada and Exequiel Rapiz with back pay and
to punish officials of the company for contempt, filed on
February 13, 1952; and
Case No. 584-V(6) petition of union for reinstatement
of Ibardolaza and seven other member-laborers and to
punish the officers of the company for contempt, filed
on July 15, 1953.
These five cases were heard jointly. In the meantime Ramon
Tantongco supposed to be the owner and manager of the La
Campana Starch Factory and the person in charge of the La
Campana Coffee Factory died on May 16, 1956. On motion of the
labor union, the Court of Industrial Relations order the inclusion
as party respondent of the administrator of the estate of Ramon
Tantongco who was Ricardo Tantongco.
Ricardo Tantongco, as administrator, under a special appearance
filed a motion to dismiss all the cases including the main case,
that is to say, Cases No. 584-(V) to 584-V(6), on the ground that
said cases involved claims for sums of money and consequently
should be filed before the probate court having jurisdiction over
the estate, pursuant to the provisions of Rule 3, Section 21, and

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Rule 88, Section 1 of the Rules of Court. On August 23, 1956, the
Court of Industrial Relations denied the motion to dismiss and
proceed to hear the incidental cases against the La Campana
entities.
On June 12, 1956, a partial decision was rendered in the main
case No. 584-V, which partial decision was elevated to us and is
still pending appeal. On February 18, 1957, the Court of Industrial
Relations issued an order in incidental Cases No. 584-V(1), V(2),
V(5) and V(6), directing the "management of the respondent
company and or the administrator of the Estate of Ramon
Tantongco", to reinstate the dismissed laborers mentioned therein
with back wages. This order of February 18, 1957, as well as the
order directing the inclusion of the administrator of the estate of
Ramon Tantongco as additional respondent in the incidental
cases, and the order denying the petition of the administrator to
dismiss said incidental cases were appealed to this tribunal
though certiorari. The appeal, however, was summarily dismissed
by this Court in its resolution of June 12, 1957, as follows:
This Court, deliberating upon the allegations of the
petition filed in case l-12355 (La Campana Starch
Coffee Factory et al. vs. Kaisahan ng Mga
Manggagawa sa la Campana, KKM, et al) for review, on
certiorari of the decision of the Court of Industrial
Relations referred to therein, and finding that there is no
merit in the petition, RESOLVE TO DISMISS the same.
The CIR order of February 18, ,1957, in the incidental cases Nos.
584-V to V(6), having become final and executory , the laborers
involved reported for work on August 28, 1957, but they were not
admitted by the management. Consequently, the union filed a
petition dated August 30, 1957, to hold respondents in said cases
for contempt. After hearing the CIR issued the order of September
30, 1957, subject of this petition, ordering "the La Campana
Starch and Coffee Factory or its manager or the person who has
charge of its management and the administrator of the estate of
Ramon Tantongco" to "reinstate the persons named in the order
of February 18, 1957" and "to deposit the amount of P65,534.01."
For refusal or failure to comply with said order, petitioner Ricardo
Tantongco was required to appear before the attorney of the CIR
in contempt proceedings. Petitioner now seeks to prohibit the CIR
from proceeding with the trial for contempt and to enjoin
respondent CIR from enforcing its order of September 30, 1957.
Petitioner contends that upon the death of Ramon Tantongco, the
claims of the laborers should have been dismissed and that said
claims should have been filed with the probate court having
jurisdiction over the administration proceedings of the estate of
Ramon Tantongco, pursuant to the provisions of Rule 3, Section
21 of the Rules of Court and that the failure to file claims with the
administrator forever barred said claims as provided in Rule 87,
Section 5 of the Rules of Court, especially after the assets of the
estate had been distributed among the heirs, and petitioner had
ceased to be the administrator of the estate. As already stated
this same question was raised by petitioner in G.R. No. L-12355,
entitled "La Campana Starch and Coffee Factory and Ricardo
Tantongco, etc. vs. Kaisahan ng mga Manggagawa sa La
Campana (KKM)," which, as already stated, was summarily
dismissed by this Court in a resolution dated June 12, 1957.
Consequently, said question may not again be raised in the
present case. Furthermore, it may be recalled that both in the
main case in the incidental cases No. 584-V to 584-V(6), Ramon
Tantongco was never a party. The party there was the La
Campana Starch and Coffee Factory by which name it was
sought to designate the two entities La Campana Starch Packing
and the La Campana Coffee Factory. Naturally, the claims
contained in said cases were not the claims contemplated by law

to be submitted before the administrator. In other words the death

of Ramon Tantongco did not deprive the CIR of its jurisdiction
over the cases aforementioned. Moreover, the money claims of
the laborers were merely incidental to their demands for
reinstatement for having been unjustly dismissed, and for better
working conditions.
Petitioner, however, contends that in G.R. No. L-5677, we
"pierced the veil of corporate existence", and held that the La
Campana Starch and Coffee Factory and its owner, Ramon
Tantongco, were one; so that with the death of Ramon, the La
Campana entities ceased to exist, resulting in the loss of
jurisdiction of the CIR to enforce its order against said entities.
The reason we applied the so-called "piercing the veil of
corporate existence" in G.R. No. L-5677 was to avoid the
technicality therein advanced in order to defeat the jurisdiction of
the CIR. We there found that although there were ostensibly two
separate companies or entities, they were managed by the same
person or persons and the workers in both were used
interchangeably so that in order to determine whether or not the
CIR had jurisdiction, the number of workers in both entitles, not in
only one, was to be considered. However, we still believe that
although the family of Ramon Tantongco was practically the
owner of both the coffee factory and the starch factory,
nevertheless these entities are separate from the personality of
Ramon. The coffee factory is a stock corporation and the shares
are owned not only by Ramon but also by others, such as
petitioner Ricardo who not only is a stockholder and director and
treasurer but also the management of the same Furthermore,
petitioner is now estopped from claiming that the two entities in
question and Ramon are one. Thus in Annex 3-CIR (par. 1
thereof) which is a complaint for injunction filed by La Campana
Food Products, et al and La Campana Starch Packing against the
consolidated Labor Organization of the Philippines, in civil Case
No. P-25482 in the Court of First Instance of Rizal, petitioner
admitted the existence and operation of said entities; in Annex 4
CIR where petitioner appeared as General Manager
representing the two entities in its agreement with the La
Campana Workers Union to resolve the dispute between the two
entities and the laborers in case Nos. 1072-V and 1371-ULP, the
existence of the two entities appears to have been admitted; and
in Annex 5-A-CIR, an answer to the complaint of La Campana
Workers Union in case No. 1471-ULP (Annex 5-CIR), petitioner
admitted the allegation that said two factories were in existence
and doing business with petitioner as manager of the same.
In relation to the order of the CIR requiring petitioner to appear in
the contempt proceedings instituted against him, petitioner
contends that after he ceased to be the administrator of the estate
of Ramon Tantongco, he may not now be compelled to comply
with the order of the court. In answer, it is enough to bear in mind
the jurisdiction and authority of the CIR as to compliance with and
violations of its orders under section 6, Commonwealth Act No.
143, which we quote below:
. . . The Court or any Judge thereof shall have
furthermore, all the inherent powers of a court of justice
provided in paragraph 5 of Rule 124 of the Supreme
Court, as well as the power to punish direct and indirect
contempt as provided in Rule 64 of the same Court,
under the same procedure and penalties provided
therein.
Any violation of any order, award, or decision of the
Court of Industrial Relations shall, after such order,
award or decision has become final, conclusive, and
executory, constitute contempt of court: . . .

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In case the employer (or landlord) committing any such

violation or contempt is an association or corporation,
the manager or the person who has the charge of the
management of the business of the association or
corporation and the officers of directors thereof who
have ordered or authorized the violation of contempt
shall be liable. . . .
In conclusion, we find and hold that the La Campana Starch and
Food Products Company which stands for the La Campana
Starch and Coffee Factory are entities distinct from the
personality of Ramon Tantongco; that after the death of Ramon
these two entities continued to exist and to operate under the
management of petitioner and that consequently he is the proper
person and official to which the orders of the CIR are addressed
and who is in duty bound to comply with the same. We further find
that the CIR acted with in its jurisdiction in issuing its order of
September 30, 1957 and in requiring petitioner to appear to give
his evidence if any in relation with the contempt proceedings
instituted against him.1wphl.nt
In view of the foregoing, the petition for certiorari is .hereby
denied and the writ of preliminary injunction dissolved, with costs.
Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador,
Concepcion, Endencia and Barrera, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-20886

April 27, 1967

NATIONAL MARKETING CORPORATION (NAMARCO),

plaintiff-appellant,
vs.
ASSOCIATED FINANCE COMPANY, INC., and FRANCISCO
SYCIP, defendants.
FRANCISCO SYCIP, defendant-appellee.
SYLLABUS

1. CORPORATION; STOCKHOLDERS; LIABILITY FOR

CORPORATE OBLIGATIONS. A stockholder is guilty of fraud
where, through false representations, he succeeded in inducing
another corporation to enter into an exchange agreement with the
corporation he represented and over whose business he had
absolute control knowing that the letter was in no position to
comply with the obligation it had assumed. Consequently, said
stockholder cannot now seek refuge behind the general principle
that a corporation has a personality distinct and separate from
that of its stockholders and that the latter are not personally liable
for the corporate obligations. Upon the facts proven, the court is
justified in "piercing the veil of corporate fiction" and in holding
said stockholder personally liable, jointly and severally with the
corporation, for the sums of money adjudged in favor of the
aggrieved party.
2. ID.; WHEN MAY CORPORATE FICTION BE DISREGARDED.
It is settled law in this and other jurisdictions that when the
corporation is the mere alter ego of a person, the corporate fiction
may be disregarded; the same being true when the corporation is
controlled, and its affairs are so conducted as to make it merely
an instrumentality, agency or conduit of another (Koppel Phils.
etc. v. Yatco etc., 43 Off. Gaz., No. 11, November, 1947; Yutivo
Sons etc. v. Court of Tax Appeals etc., 110 Phil., 751; promulgated
on January 28, 1961.)
DIZON, J.:
Appeal by the National Marketing Corporation hereinafter
referred to as NAMARCO, from the decision of the Court of First
Instance of Manila in Civil Case No. 45770 ordering the
Associated Finance Company, Inc. hereinafter referred to as
the ASSOCIATED to pay the NAMARCO the sum of
P403,514.28, with legal interest thereon from the date of filing of
the action until fully paid, P80,702.26 as liquidated damages,
P5,000.00 as attorney's fees, plus costs, but dismissing the
complaint insofar as defendant Francisco Sycip was concerned,
as well as the latter's counterclaim. The appeal is only from that
portion of the decision dismissing the case as against Francisco
Sycip.

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On March 25, 1958, ASSOCIATED, a domestic corporation,

through its President, appellee Francisco Sycip, entered into an
agreement to exchange sugar with NAMARCO, represented by its
then General Manager, Benjamin Estrella, whereby the former
would deliver to the latter 22,516 bags (each weighing 100
pounds) of "Victorias" and/or "National" refined sugar in exchange
for 7,732.71 bags of "Busilak" and 17,285.08 piculs of "Pasumil"
raw sugar belonging to NAMARCO, both agreeing to pay
liquidated damages equivalent to 20% of the contractual value of
the sugar should either party fail to comply with the terms and
conditions stipulated (Exhibit A). Pursuant thereto, on May
19,1958, NAMARCO delivered to ASSOCIATED 7,732.71 bars of
"Busilak" and 17,285.08 piculs of "Pasumil" domestic raw sugar.
As ASSOCIATED failed to deliver to NAMARCO the 22,516 bags
of "Victoria" and/or "National" refined sugar agreed upon, the
latter, on January 12, 1959, demanded in writing from the
ASSOCIATED either (a) immediate delivery thereof before
January 20, or (b) payment of its equivalent cash value amounting
to P372,639.80.
On January 19, 1959, ASSOCIATED, through Sycip, offered to
pay NAMARCO the value of 22,516 bags of refined sugar at the
rate of P15.30 per bag, but the latter rejected the offer. Instead,
on January 21 of the same year it demanded payment of the
7,732.71 bags of "Busilak" raw sugar at P15.30 per bag,
amounting to P118,310.40. and of the 17,285.08 piculs of
"Pasumil" raw sugar at P16.50 per picul, amounting, to
P285.203.82, or a total price of P403,514.28 for both kinds of
sugar, based on the sugar quotations (Exh. H) as of March 20,
1958 the date when the exchange agreement was entered
into.
As ASSOCIATED refused to deliver the raw sugar or pay for the
refined sugar delivered to it, inspite of repeated demands
therefore, NAMARCO instituted the present action in the lower
court to recover the sum of P403,514.28 in payment of the raw
sugar received by defendants from it; P80,702.86 as liquidated
damages; P10,000.00 as attorney's fees, expenses of litigation
and exemplary damages, with legal interest thereon from the filing
of the complaint until fully paid.
In their amended answer defendants, by way of affirmative
defenses, alleged that the correct value of the sugar delivered by
NAMARCO to them was P259,451.09 or P13.30 per bag of 100
lbs. weight (quedan basis) and not P403,514.38 as claimed by
NAMARCO. As counterclaim they prayed for the award of
P500,000.00 as moral damages, P100,000.00 as exemplary
damages and P10,000.00 as attorney's fees.
After due trial court rendered the appealed judgment. The appeal
was taken to the Court of Appeals, but on January 15, 1963 the
latter certified the case to us for final adjudication pursuant to
sections 17 and 31 of the Judiciary Act of 1948, as amended, the
amount involved being more than P200,000.00, exclusive of
interests and cost.

lead to the execution of the exchange agreement in question were

conducted exclusively by Sycip on behalf of ASSOCIATED; that,
as a matter of fact, in the course of his testimony, Sycip referred
to himself as the one who contracted or transacted the business
in his personal capacity, and asserted that the exchange
agreement was his personal contract; that it was Sycip who made
personal
representations
and
gave
assurances
that
ASSOCIATED was in actual possession of the 22,516 bags of
"Victorias" and/or "National" refined sugar which the latter had
agreed to deliver to NAMARCO, and that the same was ready for
delivery; that, as a matter of fact, ASSOCIATED was at that time
already insolvent; that when NAMARCO made demands upon
ASSOCIATED to deliver the 22,516 bags of refined sugar it was
under obligation to deliver to the former, ASSOCIATED and Sycip,
instead of making delivery of the sugar, offered to pay its value at
the rate of P15.30 per bag a clear indication that they did not
have the sugar contracted for.1wph1.t
The foregoing facts, fully established by the evidence, can lead to
no other conclusion than that Sycip was guilty of fraud because
through false representations he succeeded in inducing
NAMARCO to enter into the aforesaid exchange agreement, with
full knowledge, on his part, on the fact that ASSOCIATED whom
he represented and over whose business and affairs he had
absolute control, was in no position to comply with the obligation it
had assumed. Consequently, he can not now seek refuge behind
the general principle that a corporation has a personality distinct
and separate from that of its stockholders and that the latter are
not personally liable for the corporate obligations. To the contrary,
upon the proven facts, We feel perfectly justified in "piercing the
veil of corporate fiction" and in holding Sycip personally liable,
jointly and severally with his co-defendant, for the sums of money
adjudged in favor of appellant. It is settled law in this and other
jurisdictions that when the corporation is the mere alter ego of a
person, the corporate fiction may be disregarded; the same being
true when the corporation is controlled, and its affairs are so
conducted as to make it merely an instrumentality, agency or
conduit of another (Koppel Phils., etc. vs. Yatco, etc., 43 O.G. No.
11. Nov. 1947; Yutivo Sons, etc. vs. Court of Tax Appeals, etc.,
G.R. No. L-13203, promulgated on January 28, 1961).
Wherefore, the decision appealed from is modified by sentencing
defendant-appellee Francisco Sycip to pay, jointly and severally
with the Associated Finance Company, Inc., the sum of money
which the trial court sentenced the latter to pay to the National
Marketing Corporation, as follows: the sum of FOUR HUNDRED
THREE THOUSAND FIVE HUNDRED FOURTEEN PESOS, and
TWENTY-EIGHT CENTAVOS P403,514.28), with interest at the
legal rate from the date of the filing of the action until fully paid
plus an additional amount of EIGHTY THOUSAND SEVEN
HUNDRED TWO PESOS and EIGHTY-SIX CENTAVOS
(P80,702.86) as liquidated damages and P5,000.00 as attorney's
fees and further to pay the costs. With costs.
Concepcion, C.J., Reyes, J.B.L., Regala, Makalintal, Bengzon,
J.P.,
Zaldivar
and
Sanchez
JJ.,
concur.
Castro, J., took no part.

The only issue to be resolved is whether, upon the facts found by

the trial court, which, in our opinion, are fully supported by the
evidence Francisco Sycip may be held liable, jointly and
severally with his co-defendant, for the sums of money adjudged
in favor of NAMARCO.
The evidence of record shows that, of the capital stock of
ASSOCIATED, Sycip owned P60,000.00 worth of shares, while
his wife the second biggest stockholder owned P20,000.00
worth of shares; that the par value of the subscribed capital stock
of ASSOCIATED was only P105,000.00; that negotiations that

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CORPORATION LAW | 135

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-23893

October 29, 1968

VILLA REY TRANSIT, INC., plaintiff-appellant,

vs.
EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO.,
INC. and PUBLIC SERVICE COMMISSION, defendants.
EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION
CO., INC., defendants-appellants.
PANGASINAN TRANSPORTATION CO., INC., third-party
plaintiff-appellant,
vs.
JOSE M. VILLARAMA, third-party defendant-appellee.

SYLLABUS

1. COMMERCIAL LAW; CORPORATIONS; CORPORATION

SEPARATE AND DISTINCT FROM MEMBERS THEREOF;
DOCTRINE OF PIERCING THE CORPORATE VEIL. The
doctrine that a corporation is a legal entity distinct and separate
from the members and stockholders who compose it is
recognized and respected in all cases which are within reason
and the law. When the fiction is urged as a means of perpetrating
a fraud or an illegal act or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, the achievement
or perfection of a monopoly or generally the perpetration of
knavery or crime, the veil with which the law covers and isolates
the corporation from the members or stockholders who compose
it will be lifted to allow for its consideration merely as an
aggregation of individuals.
2. ID.; ID.; ALTER EGO; CORPORATION BOUND BY
CONTRACT WHEN SHOWN AS ALTER EGO OF
COVENANTOR. The preponderance of evidence have shown
that the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama,
and that the restrictive clause in the contract entered into by the
latter and Pantranco is also enforceable and binding against the
said Corporation. For the rule is that a seller or promissor may not
make use of a corporate entity as a means of evading the
obligation of his covenant. Where the corporation is substantially
the alter ego of the covenantor to the restrictive agreement, it can
be enjoined from competing with the covenantee.
3. CIVIL LAW; CONTRACTS; VALIDITY OF STIPULATION IN
RESTRAINT OF TRADE. The 10-year restrictive clause in the
contract between Villarama and Pantranco, while in the nature of
an agreement suppressing competition, it is, however, merely
ancillary or incidental to the main agreement which is that of sale.
The suppression or restraint is only partial or limited: first, in
scope, it refers only to application for TPU by the seller in

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CORPORATION LAW | 136

competition with the lines sold to the buyer; second, in duration, it

is only for ten (10) years; and third, with respect to situs or
territory, the restraint is only along the lines covered by the
certificates sold. In view of these limitations, coupled with the
consideration of P350,000.00 for just two certificates of public
convenience, and considering, furthermore, that the disputed
stipulation is only incidental to a main agreement, the same is
reasonable and it is not harmful nor obnoxious to public service. It
does not appear that the ultimate result of the clause or stipulation
would be to leave solely to Pantranco the right to operate along
the lines in question, thereby establishing a monopoly or
predominance approximating thereto. The main purpose of the
restraint was to protect for a limited time the business of the
buyer.
4. ID.; ID.; PURCHASER IN GOOD FAITH; RULE OF CAVEAT
EMPTOR. The 10 year prohibition upon Villarama is not
against his application for, or purchase of, certificates of public
convenience, but merely the operation of TPU along the lines
covered by the certificates sold by him to Pantranco.
Consequently, the sale between Fernando and the Corporation is
valid, such that the rightful ownership of the disputed certificates
still belongs to the plaintiff being the prior purchaser in good faith
and for value thereof. In view of the ancient rule of caveat emptor
prevailing in this jurisdiction, what was acquired by Ferrer in the
sheriffs sale was only the right which Fernando, judgment debtor,
had in the certificates of public convenience on the day of the
sale.
5. ADMINISTRATIVE LAW; PUBLIC SERVICE LAW;
CERTIFICATE OF PUBLIC CONVENIENCE; SALE THEREOF;
APPROVAL BY PUBLIC SERVICE COMMISSION NOT
NECESSARY FOR THIS CONSUMMATION OF THE SALE IN
THE INSTANT CASE. There is no merit in Pantranco and
Ferrers theory that the sale of the certificates of public
convenience in question, between the corporation and Fernando,
was not consummated, it being only a conditional sale subject to
the suspensive condition of its approval by the Public Service
Commission. It is clear, that the requisite approval of the PSC is
not a condition precedent for the validity and consummation of the
sale.
ANGELES, J.:
This is a tri-party appeal from the decision of the Court of First
Instance of Manila, Civil Case No. 41845, declaring null and void
the sheriff's sale of two certificates of public convenience in favor
of defendant Eusebio E. Ferrer and the subsequent sale thereof
by the latter to defendant Pangasinan Transportation Co., Inc.;
declaring the plaintiff Villa Rey Transit, Inc., to be the lawful owner
of the said certificates of public convenience; and ordering the
private defendants, jointly and severally, to pay to the plaintiff, the
sum of P5,000.00 as and for attorney's fees. The case against the
PSC was dismissed.
The rather ramified circumstances of the instant case can best be
understood by a chronological narration of the essential facts, to
wit:
Prior to 1959, Jose M. Villarama was an operator of a bus
transportation, under the business name of Villa Rey Transit,
pursuant to certificates of public convenience granted him by the
Public Service Commission (PSC, for short) in Cases Nos. 44213
and 104651, which authorized him to operate a total of thirty-two
(32) units on various routes or lines from Pangasinan to Manila,
and vice-versa. On January 8, 1959, he sold the aforementioned
two certificates of public convenience to the Pangasinan
Transportation Company, Inc. (otherwise known as Pantranco),

for P350,000.00 with the condition, among others, that the seller
(Villarama) "shall not for a period of 10 years from the date of this
sale, apply for any TPU service identical or competing with the
buyer."
Barely three months thereafter, or on March 6, 1959: a
corporation called Villa Rey Transit, Inc. (which shall be referred
to hereafter as the Corporation) was organized with a capital
stock of P500,000.00 divided into 5,000 shares of the par value of
P100.00 each; P200,000.00 was the subscribed stock; Natividad
R. Villarama (wife of Jose M. Villarama) was one of the
incorporators, and she subscribed for P1,000.00; the balance of
P199,000.00 was subscribed by the brother and sister-in-law of
Jose M. Villarama; of the subscribed capital stock, P105,000.00
was paid to the treasurer of the corporation, who was Natividad R.
Villarama.
In less than a month after its registration with the Securities and
Exchange Commission (March 10, 1959), the Corporation, on
April 7, 1959, bought five certificates of public convenience, fortynine buses, tools and equipment from one Valentin Fernando, for
the sum of P249,000.00, of which P100,000.00 was paid upon the
signing of the contract; P50,000.00 was payable upon the final
approval of the sale by the PSC; P49,500.00 one year after the
final approval of the sale; and the balance of P50,000.00 "shall be
paid by the BUYER to the different suppliers of the SELLER."
The very same day that the aforementioned contract of sale was
executed, the parties thereto immediately applied with the PSC
for its approval, with a prayer for the issuance of a provisional
authority in favor of the vendee Corporation to operate the service
therein involved.1 On May 19, 1959, the PSC granted the
provisional permit prayed for, upon the condition that "it may be
modified or revoked by the Commission at any time, shall be
subject to whatever action that may be taken on the basic
application and shall be valid only during the pendency of said
application." Before the PSC could take final action on said
application for approval of sale, however, the Sheriff of Manila, on
July 7, 1959, levied on two of the five certificates of public
convenience involved therein, namely, those issued under PSC
cases Nos. 59494 and 63780, pursuant to a writ of execution
issued by the Court of First Instance of Pangasinan in Civil Case
No. 13798, in favor of Eusebio Ferrer, plaintiff, judgment creditor,
against Valentin Fernando, defendant, judgment debtor. The
Sheriff made and entered the levy in the records of the PSC. On
July 16, 1959, a public sale was conducted by the Sheriff of the
said two certificates of public convenience. Ferrer was the highest
bidder, and a certificate of sale was issued in his name.
Thereafter, Ferrer sold the two certificates of public convenience
to Pantranco, and jointly submitted for approval their
corresponding contract of sale to the PSC. 2 Pantranco therein
prayed that it be authorized provisionally to operate the service
involved in the said two certificates.
The applications for approval of sale, filed before the PSC, by
Fernando and the Corporation, Case No. 124057, and that of
Ferrer and Pantranco, Case No. 126278, were scheduled for a
joint hearing. In the meantime, to wit, on July 22, 1959, the PSC
issued an order disposing that during the pendency of the cases
and before a final resolution on the aforesaid applications, the
Pantranco shall be the one to operate provisionally the service
under the two certificates embraced in the contract between
Ferrer and Pantranco. The Corporation took issue with this
particular ruling of the PSC and elevated the matter to the
Supreme Court,3 which decreed, after deliberation, that until the
issue on the ownership of the disputed certificates shall have

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CORPORATION LAW | 137

been finally settled by the proper court, the Corporation should be

the one to operate the lines provisionally.
On November 4, 1959, the Corporation filed in the Court of First
Instance of Manila, a complaint for the annulment of the sheriff's
sale of the aforesaid two certificates of public convenience (PSC
Cases Nos. 59494 and 63780) in favor of the defendant Ferrer,
and the subsequent sale thereof by the latter to Pantranco,
against Ferrer, Pantranco and the PSC. The plaintiff Corporation
prayed therein that all the orders of the PSC relative to the
parties' dispute over the said certificates be annulled.
In separate answers, the defendants Ferrer and Pantranco
averred that the plaintiff Corporation had no valid title to the
certificates in question because the contract pursuant to which it
acquired them from Fernando was subject to a suspensive
condition the approval of the PSC which has not yet been
fulfilled, and, therefore, the Sheriff's levy and the consequent sale
at public auction of the certificates referred to, as well as the sale
of the same by Ferrer to Pantranco, were valid and regular, and
vested unto Pantranco, a superior right thereto.
Pantranco, on its part, filed a third-party complaint against Jose
M. Villarama, alleging that Villarama and the Corporation, are one
and the same; that Villarama and/or the Corporation was
disqualified from operating the two certificates in question by
virtue of the aforementioned agreement between said Villarama
and Pantranco, which stipulated that Villarama "shall not for a
period of 10 years from the date of this sale, apply for any TPU
service identical or competing with the buyer."
Upon the joinder of the issues in both the complaint and thirdparty complaint, the case was tried, and thereafter decision was
rendered in the terms, as above stated.
As stated at the beginning, all the parties involved have appealed
from the decision. They submitted a joint record on appeal.
Pantranco disputes the correctness of the decision insofar as it
holds that Villa Rey Transit, Inc. (Corporation) is a distinct and
separate entity from Jose M. Villarama; that the restriction clause
in the contract of January 8, 1959 between Pantranco and
Villarama is null and void; that the Sheriff's sale of July 16, 1959,
is likewise null and void; and the failure to award damages in its
favor and against Villarama.
Ferrer, for his part, challenges the decision insofar as it holds that
the sheriff's sale is null and void; and the sale of the two
certificates in question by Valentin Fernando to the Corporation, is
valid. He also assails the award of P5,000.00 as attorney's fees in
favor of the Corporation, and the failure to award moral damages
to him as prayed for in his counterclaim.
The Corporation, on the other hand, prays for a review of that
portion of the decision awarding only P5,000.00 as attorney's
fees, and insisting that it is entitled to an award of P100,000.00 by
way of exemplary damages.
After a careful study of the facts obtaining in the case, the vital
issues to be resolved are: (1) Does the stipulation between
Villarama and Pantranco, as contained in the deed of sale, that
the former "SHALL NOT FOR A PERIOD OF 10 YEARS FROM
THE DATE OF THIS SALE, APPLY FOR ANY TPU SERVICE
IDENTICAL OR COMPETING WITH THE BUYER," apply to new
lines only or does it include existing lines?; (2) Assuming that said

stipulation covers all kinds of lines, is such stipulation valid and

enforceable?; (3) In the affirmative, that said stipulation is valid,
did it bind the Corporation?
For convenience, We propose to discuss the foregoing issues by
starting with the last proposition.
The evidence has disclosed that Villarama, albeit was not an
incorporator or stockholder of the Corporation, alleging that he did
not become such, because he did not have sufficient funds to
invest, his wife, however, was an incorporator with the least
subscribed number of shares, and was elected treasurer of the
Corporation. The finances of the Corporation which, under all
concepts in the law, are supposed to be under the control and
administration of the treasurer keeping them as trust fund for the
Corporation, were, nonetheless, manipulated and disbursed as if
they were the private funds of Villarama, in such a way and extent
that Villarama appeared to be the actual owner-treasurer of the
business without regard to the rights of the stockholders. The
following testimony of Villarama,4 together with the other evidence
on record, attests to that effect:
Q.
Doctor, I want to go back again to the
incorporation of the Villa Rey Transit, Inc. You heard the
testimony presented here by the bank regarding the
initial opening deposit of ONE HUNDRED FIVE
THOUSAND PESOS, of which amount Eighty-Five
Thousand Pesos was a check drawn by yourself
personally. In the direct examination you told the Court
that the reason you drew a check for Eighty-Five
Thousand Pesos was because you and your wife, or
your wife, had spent the money of the stockholders
given to her for incorporation. Will you please tell the
Honorable Court if you knew at the time your wife was
spending the money to pay debts, you personally knew
she was spending the money of the incorporators?
A.
You know my money and my wife's money are
one. We never talk about those things.
Q.
Doctor, your answer then is that since your
money and your wife's money are one money and you
did not know when your wife was paying debts with the
incorporator's money?
A.
Because sometimes she uses my money, and
sometimes the money given to her she gives to me and
I deposit the money.
Q.
Actually, aside from your wife, you were also the
custodian of some of the incorporators here, in the
beginning?
A.
Not necessarily, they give to my wife and when
my wife hands to me I did not know it belonged to the
incorporators.
Q.
It supposes then your wife gives you some of the
money received by her in her capacity as treasurer of
the corporation?
A.

Maybe.

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CORPORATION LAW | 138

Q.
What did you do with the money, deposit in a
regular account?
A.

Deposit in my account.

Q.
Of all the money given to your wife, she did not
receive any check?
A.

I do not remember.

Q.
Is it usual for you, Doctor, to be given Fifty
Thousand Pesos without even asking what is this?
xxx

xxx

xxx

JUDGE:

Reform the question.

Q.
The subscription of your brother-in-law, Mr.
Reyes, is Fifty-Two Thousand Pesos, did your wife give
you Fifty-two Thousand Pesos?
A.
I have testified before that sometimes my wife
gives me money and I do not know exactly for what.
The evidence further shows that the initial cash capitalization of
the corporation of P105,000.00 was mostly financed by Villarama.
Of the P105,000.00 deposited in the First National City Bank of
New York, representing the initial paid-up capital of the
Corporation, P85,000.00 was covered by Villarama's personal
check. The deposit slip for the said amount of P105,000.00 was
admitted in evidence as Exh. 23, which shows on its face that
P20,000.00 was paid in cash and P85,000.00 thereof was
covered by Check No. F-50271 of the First National City Bank of
New York. The testimonies of Alfonso Sancho 5 and Joaquin
Amansec,6 both employees of said bank, have proved that the
drawer of the check was Jose Villarama himself.
Another witness, Celso Rivera, accountant of the Corporation,
testified that while in the books of the corporation there appears
an entry that the treasurer received P95,000.00 as second
installment of the paid-in subscriptions, and, subsequently, also
P100,000.00 as the first installment of the offer for second
subscriptions worth P200,000.00 from the original subscribers, yet
Villarama directed him (Rivera) to make vouchers liquidating the
sums.7 Thus, it was made to appear that the P95,000.00 was
delivered to Villarama in payment for equipment purchased from
him, and the P100,000.00 was loaned as advances to the
stockholders. The said accountant, however, testified that he was
not aware of any amount of money that had actually passed
hands among the parties involved,8 and actually the only money
of the corporation was the P105,000.00 covered by the deposit
slip Exh. 23, of which as mentioned above, P85,000.00 was paid
by Villarama's personal check.
Further, the evidence shows that when the Corporation was in its
initial months of operation, Villarama purchased and paid with his
personal checks Ford trucks for the Corporation. Exhibits 20 and
21 disclose that the said purchases were paid by Philippine Bank
of Commerce Checks Nos. 992618-B and 993621-B, respectively.
These checks have been sufficiently established by Fausto Abad,
Assistant Accountant of Manila Trading & Supply Co., from which
the trucks were purchased9 and Aristedes Solano, an employee of
the Philippine Bank of Commerce,10 as having been drawn by
Villarama.

Exhibits 6 to 19 and Exh. 22, which are photostatic copies of

ledger entries and vouchers showing that Villarama had comingled his personal funds and transactions with those made in
the name of the Corporation, are very illuminating evidence.
Villarama has assailed the admissibility of these exhibits,
contending that no evidentiary value whatsoever should be given
to them since "they were merely photostatic copies of the
originals, the best evidence being the originals themselves."
According to him, at the time Pantranco offered the said exhibits,
it was the most likely possessor of the originals thereof because
they were stolen from the files of the Corporation and only
Pantranco was able to produce the alleged photostat copies
thereof.
Section 5 of Rule 130 of the Rules of Court provides for the
requisites for the admissibility of secondary evidence when the
original is in the custody of the adverse party, thus: (1) opponent's
possession of the original; (2) reasonable notice to opponent to
produce the original; (3) satisfactory proof of its existence; and (4)
failure or refusal of opponent to produce the original in court. 11
Villarama has practically admitted the second and fourth
requisites.12 As to the third, he admitted their previous existence in
the files of the Corporation and also that he had seen some of
them.13 Regarding the first element, Villarama's theory is that
since even at the time of the issuance of the subpoena duces
tecum, the originals were already missing, therefore, the
Corporation was no longer in possession of the same. However, it
is not necessary for a party seeking to introduce secondary
evidence to show that the original is in the actual possession of
his adversary. It is enough that the circumstances are such as to
indicate that the writing is in his possession or under his control.
Neither is it required that the party entitled to the custody of the
instrument should, on being notified to produce it, admit having it
in his possession.14 Hence, secondary evidence is admissible
where he denies having it in his possession. The party calling for
such evidence may introduce a copy thereof as in the case of
loss. For, among the exceptions to the best evidence rule is
"when the original has been lost, destroyed, or cannot be
produced in court."15 The originals of the vouchers in question
must be deemed to have been lost, as even the Corporation
admits such loss. Viewed upon this light, there can be no doubt
as to the admissibility in evidence of Exhibits 6 to 19 and 22.
Taking account of the foregoing evidence, together with Celso
Rivera's testimony,16 it would appear that: Villarama supplied the
organization expenses and the assets of the Corporation, such as
trucks and equipment;17 there was no actual payment by the
original subscribers of the amounts of P95,000.00 and
P100,000.00 as appearing in the books; 18 Villarama made use of
the money of the Corporation and deposited them to his private
accounts;19 and the Corporation paid his personal accounts.20
Villarama himself admitted that he mingled the corporate funds
with his own money.21 He also admitted that gasoline purchases
of the Corporation were made in his name 22 because "he had
existing account with Stanvac which was properly secured and he
wanted the Corporation to benefit from the rebates that he
received."23
The foregoing circumstances are strong persuasive evidence
showing that Villarama has been too much involved in the affairs
of the Corporation to altogether negative the claim that he was
only a part-time general manager. They show beyond doubt that
the Corporation is his alter ego.
It is significant that not a single one of the acts enumerated above
as proof of Villarama's oneness with the Corporation has been

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CORPORATION LAW | 139

denied by him. On the contrary, he has admitted them with offered

excuses.

stockholders who compose it will be lifted to allow for its

consideration merely as an aggregation of individuals.

Villarama has admitted, for instance, having paid P85,000.00 of

the initial capital of the Corporation with the lame excuse that "his
wife had requested him to reimburse the amount entrusted to her
by the incorporators and which she had used to pay the
obligations of Dr. Villarama (her husband) incurred while he was
still the owner of Villa Rey Transit, a single proprietorship." But
with his admission that he had received P350,000.00 from
Pantranco for the sale of the two certificates and one unit,24 it
becomes difficult to accept Villarama's explanation that he and his
wife, after consultation,25 spent the money of their relatives (the
stockholders) when they were supposed to have their own money.
Even if Pantranco paid the P350,000.00 in check to him, as
claimed, it could have been easy for Villarama to have deposited
said check in his account and issued his own check to pay his
obligations. And there is no evidence adduced that the said
amount of P350,000.00 was all spent or was insufficient to settle
his prior obligations in his business, and in the light of the
stipulation in the deed of sale between Villarama and Pantranco
that P50,000.00 of the selling price was earmarked for the
payments of accounts due to his creditors, the excuse appears
unbelievable.

Upon the foregoing considerations, We are of the opinion, and so

hold, that the preponderance of evidence have shown that the
Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and
that the restrictive clause in the contract entered into by the latter
and Pantranco is also enforceable and binding against the said
Corporation. For the rule is that a seller or promisor may not make
use of a corporate entity as a means of evading the obligation of
his covenant.31 Where the Corporation is substantially the alter
ego of the covenantor to the restrictive agreement, it can be
enjoined from competing with the covenantee.32

On his having paid for purchases by the Corporation of trucks

from the Manila Trading & Supply Co. with his personal checks,
his reason was that he was only sharing with the Corporation his
credit with some companies. And his main reason for mingling his
funds with that of the Corporation and for the latter's paying his
private bills is that it would be more convenient that he kept the
money to be used in paying the registration fees on time, and
since he had loaned money to the Corporation, this would be set
off by the latter's paying his bills. Villarama admitted, however,
that the corporate funds in his possession were not only for
registration fees but for other important obligations which were not
specified.26
Indeed, while Villarama was not the Treasurer of the Corporation
but was, allegedly, only a part-time manager,27 he admitted not
only having held the corporate money but that he advanced and
lent funds for the Corporation, and yet there was no Board
Resolution allowing it.28
Villarama's explanation on the matter of his involvement with the
corporate affairs of the Corporation only renders more credible
Pantranco's claim that his control over the corporation, especially
in the management and disposition of its funds, was so extensive
and intimate that it is impossible to segregate and identify which
money belonged to whom. The interference of Villarama in the
complex affairs of the corporation, and particularly its finances,
are much too inconsistent with the ends and purposes of the
Corporation law, which, precisely, seeks to separate personal
responsibilities from corporate undertakings. It is the very
essence of incorporation that the acts and conduct of the
corporation be carried out in its own corporate name because it
has its own personality.
The doctrine that a corporation is a legal entity distinct and
separate from the members and stockholders who compose it is
recognized and respected in all cases which are within reason
and the law.29 When the fiction is urged as a means of
perpetrating a fraud or an illegal act or as a vehicle for the
evasion of an existing obligation, the circumvention of statutes,
the achievement or perfection of a monopoly or generally the
perpetration of knavery or crime,30 the veil with which the law
covers and isolates the corporation from the members or

The Corporation contends that even on the supposition that Villa

Rey Transit, Inc. and Villarama are one and the same, the
restrictive clause in the contract between Villarama and
Pantranco does not include the purchase of existing lines but it
only applies to application for the new lines. The clause in dispute
reads thus:
(4) The SELLER shall not, for a period of ten (10) years
from the date of this sale apply for any TPU service
identical or competing with the BUYER. (Emphasis
supplied)
As We read the disputed clause, it is evident from the context
thereof that the intention of the parties was to eliminate the seller
as a competitor of the buyer for ten years along the lines of
operation covered by the certificates of public convenience
subject of their transaction. The word "apply" as broadly used has
for frame of reference, a service by the seller on lines or routes
that would compete with the buyer along the routes acquired by
the latter. In this jurisdiction, prior authorization is needed before
anyone can operate a TPU service, 33whether the service consists
in a new line or an old one acquired from a previous operator. The
clear intention of the parties was to prevent the seller from
conducting any competitive line for 10 years since, anyway, he
has bound himself not to apply for authorization to operate along
such lines for the duration of such period.34
If the prohibition is to be applied only to the acquisition of new
certificates of public convenience thru an application with the
Public Service Commission, this would, in effect, allow the seller
just the same to compete with the buyer as long as his authority
to operate is only acquired thru transfer or sale from a previous
operator, thus defeating the intention of the parties. For what
would prevent the seller, under the circumstances, from having a
representative or dummy apply in the latter's name and then later
on transferring the same by sale to the seller? Since stipulations
in a contract is the law between the contracting parties,
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. 19, New Civil Code.)
We are not impressed of Villarama's contention that the rewording of the two previous drafts of the contract of sale between
Villarama and Pantranco is significant in that as it now appears,
the parties intended to effect the least restriction. We are
persuaded, after an examination of the supposed drafts, that the
scope of the final stipulation, while not as long and prolix as those
in the drafts, is just as broad and comprehensive. At most, it can
be said that the re-wording was done merely for brevity and
simplicity.

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CORPORATION LAW | 140

The evident intention behind the restriction was to eliminate the

sellers as a competitor, and this must be, considering such factors
as the good will35 that the seller had already gained from the
riding public and his adeptness and proficiency in the trade. On
this matter, Corbin, an authority on Contracts has this to say.36
When one buys the business of another as a going
concern, he usually wishes to keep it going; he wishes
to get the location, the building, the stock in trade, and
the customers. He wishes to step into the seller's shoes
and to enjoy the same business relations with other
men. He is willing to pay much more if he can get the
"good will" of the business, meaning by this the good
will of the customers, that they may continue to tread
the old footpath to his door and maintain with him the
business relations enjoyed by the seller.

agreement, the same is reasonable and it is not harmful nor

obnoxious to public service.38 It does not appear that the ultimate
result of the clause or stipulation would be to leave solely to
Pantranco the right to operate along the lines in question, thereby
establishing monopoly or predominance approximating thereto.
We believe the main purpose of the restraint was to protect for a
limited time the business of the buyer.
Indeed, the evils of monopoly are farfetched here. There can be
no danger of price controls or deterioration of the service because
of the close supervision of the Public Service Commission. 39 This
Court had stated long ago,40 that "when one devotes his property
to a use in which the public has an interest, he virtually grants to
the public an interest in that use and submits it to such public use
under reasonable rules and regulations to be fixed by the Public
Utility Commission."

... In order to be well assured of this, he obtains and

pays for the seller's promise not to reopen business in
competition with the business sold.

Regarding that aspect of the clause that it is merely ancillary or

incidental to a lawful agreement, the underlying reason sustaining
its validity is well explained in 36 Am. Jur. 537-539, to wit:

As to whether or not such a stipulation in restraint of trade is valid,

our jurisprudence on the matter37says:

... Numerous authorities hold that a covenant which is

incidental to the sale and transfer of a trade or
business, and which purports to bind the seller not to
engage in the same business in competition with the
purchaser, is lawful and enforceable. While such
covenants are designed to prevent competition on the
part of the seller, it is ordinarily neither their purpose nor
effect to stifle competition generally in the locality, nor to
prevent it at all in a way or to an extent injurious to the
public. The business in the hands of the purchaser is
carried on just as it was in the hands of the seller; the
former merely takes the place of the latter; the
commodities of the trade are as open to the public as
they were before; the same competition exists as
existed before; there is the same employment furnished
to others after as before; the profits of the business go
as they did before to swell the sum of public wealth; the
public has the same opportunities of purchasing, if it is
a mercantile business; and production is not lessened if
it is a manufacturing plant.

The law concerning contracts which tend to restrain

business or trade has gone through a long series of
changes from time to time with the changing condition
of trade and commerce. With trifling exceptions, said
changes have been a continuous development of a
general rule. The early cases show plainly a disposition
to avoid and annul all contract which prohibited or
restrained any one from using a lawful trade "at any
time or at any place," as being against the benefit of the
state. Later, however, the rule became well established
that if the restraint was limited to "a certain time" and
within "a certain place," such contracts were valid and
not "against the benefit of the state." Later cases, and
we think the rule is now well established, have held that
a contract in restraint of trade is valid providing there is
a limitation upon either time or place. A contract,
however, which restrains a man from entering into
business or trade without either a limitation as to time or
place, will be held invalid.
The public welfare of course must always be
considered and if it be not involved and the restraint
upon one party is not greater than protection to the
other requires, contracts like the one we are discussing
will be sustained. The general tendency, we believe, of
modern authority, is to make the test whether the
restraint is reasonably necessary for the protection of
the contracting parties. If the contract is reasonably
necessary to protect the interest of the parties, it will be
upheld. (Emphasis supplied.)
Analyzing the characteristics of the questioned stipulation, We
find that although it is in the nature of an agreement suppressing
competition, it is, however, merely ancillary or incidental to the
main agreement which is that of sale. The suppression or restraint
is only partial or limited: first, in scope, it refers only to application
for TPU by the seller in competition with the lines sold to the
buyer; second, in duration, it is only for ten (10) years; and third,
with respect to situs or territory, the restraint is only along the
lines covered by the certificates sold. In view of these limitations,
coupled with the consideration of P350,000.00 for just two
certificates of public convenience, and considering, furthermore,
that the disputed stipulation is only incidental to a main

The reliance by the lower court on tile case of Red Line

Transportation Co. v. Bachrach41 and finding that the stipulation is
illegal and void seems misplaced. In the said Red Line case, the
agreement therein sought to be enforced was virtually a division
of territory between two operators, each company imposing upon
itself an obligation not to operate in any territory covered by the
routes of the other. Restraints of this type, among common
carriers have always been covered by the general rule
invalidating agreements in restraint of trade. 42
Neither are the other cases relied upon by the plaintiff-appellee
applicable to the instant case. In Pampanga Bus Co., Inc. v.
Enriquez,43the undertaking of the applicant therein not to apply for
the lifting of restrictions imposed on his certificates of public
convenience was not an ancillary or incidental agreement. The
restraint was the principal objective. On the other hand, in Red
Line Transportation Co., Inc. v. Gonzaga,44 the restraint there in
question not to ask for extension of the line, or trips, or increase of
equipment was not an agreement between the parties but a
condition imposed in the certificate of public convenience itself.
Upon the foregoing considerations, Our conclusion is that the
stipulation prohibiting Villarama for a period of 10 years to "apply"
for TPU service along the lines covered by the certificates of
public convenience sold by him to Pantranco is valid and

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CORPORATION LAW | 141

reasonable. Having arrived at this conclusion, and considering

that the preponderance of the evidence have shown that Villa Rey
Transit, Inc. is itself the alter ego of Villarama, We hold, as prayed
for in Pantranco's third party complaint, that the said Corporation
should, until the expiration of the 1-year period abovementioned,
be enjoined from operating the line subject of the prohibition.
To avoid any misunderstanding, it is here to be emphasized that
the 10-year prohibition upon Villarama is not against his
application for, or purchase of, certificates of public convenience,
but merely the operation of TPU along the lines covered by the
certificates sold by him to Pantranco. Consequently, the sale
between Fernando and the Corporation is valid, such that the
rightful ownership of the disputed certificates still belongs to the
plaintiff being the prior purchaser in good faith and for value
thereof. In view of the ancient rule of caveat emptor prevailing in
this jurisdiction, what was acquired by Ferrer in the sheriff's sale
was only the right which Fernando, judgment debtor, had in the
certificates of public convenience on the day of the sale.45
Accordingly, by the "Notice of Levy Upon Personalty" the
Commissioner of Public Service was notified that "by virtue of an
Order of Execution issued by the Court of First Instance of
Pangasinan, the rights, interests, or participation which the
defendant, VALENTIN A. FERNANDO in the above entitled
case may have in the following realty/personalty is attached or
levied upon, to wit: The rights, interests and participation on the
Certificates of Public Convenience issued to Valentin A.
Fernando, in Cases Nos. 59494, etc. ... Lines Manila to
Lingayen, Dagupan, etc. vice versa." Such notice of levy only
shows that Ferrer, the vendee at auction of said certificates,
merely stepped into the shoes of the judgment debtor. Of the
same principle is the provision of Article 1544 of the Civil Code,
that "If the same thing should have been sold to different
vendees, the ownership shall be transferred to the person who
may have first taken possession thereof in good faith, if it should
be movable property."
There is no merit in Pantranco and Ferrer's theory that the sale of
the certificates of public convenience in question, between the
Corporation and Fernando, was not consummated, it being only a
conditional sale subject to the suspensive condition of its approval
by the Public Service Commission. While section 20(g) of the
Public Service Act provides that "subject to established limitation
and exceptions and saving provisions to the contrary, it shall be
unlawful for any public service or for the owner, lessee or operator
thereof, without the approval and authorization of the Commission
previously had ... to sell, alienate, mortgage, encumber or lease
its property, franchise, certificates, privileges, or rights or any part
thereof, ...," the same section also provides:
... Provided, however, That nothing herein contained
shall be construed to prevent the transaction from being
negotiated or completed before its approval or to
prevent the sale, alienation, or lease by any public
service of any of its property in the ordinary course of
its business.
It is clear, therefore, that the requisite approval of the PSC is not a
condition precedent for the validity and consummation of the sale.
Anent the question of damages allegedly suffered by the parties,
each of the appellants has its or his own version to allege.

public convenience in question, despite constructive and actual

knowledge on their part of a prior sale executed by Fernando in
favor of the said corporation, which necessitated the latter to file
the action to annul the sheriff's sale to Ferrer and the subsequent
transfer to Pantranco, it is entitled to collect actual and
compensatory damages, and attorney's fees in the amount of
P25,000.00. The evidence on record, however, does not clearly
show that said defendants acted in bad faith in their acquisition of
the certificates in question. They believed that because the bill of
sale has yet to be approved by the Public Service Commission,
the transaction was not a consummated sale, and, therefore, the
title to or ownership of the certificates was still with the seller. The
award by the lower court of attorney's fees of P5,000.00 in favor
of Villa Rey Transit, Inc. is, therefore, without basis and should be
set aside.
Eusebio Ferrer's charge that by reason of the filing of the action to
annul the sheriff's sale, he had suffered and should be awarded
moral, exemplary damages and attorney's fees, cannot be
entertained, in view of the conclusion herein reached that the sale
by Fernando to the Corporation was valid.
Pantranco, on the other hand, justifies its claim for damages with
the allegation that when it purchased ViIlarama's business for
P350,000.00, it intended to build up the traffic along the lines
covered by the certificates but it was rot afforded an opportunity to
do so since barely three months had elapsed when the contract
was violated by Villarama operating along the same lines in the
name of Villa Rey Transit, Inc. It is further claimed by Pantranco
that the underhanded manner in which Villarama violated the
contract is pertinent in establishing punitive or moral damages. Its
contention as to the proper measure of damages is that it should
be the purchase price of P350,000.00 that it paid to Villarama.
While We are fully in accord with Pantranco's claim of entitlement
to damages it suffered as a result of Villarama's breach of his
contract with it, the record does not sufficiently supply the
necessary evidentiary materials upon which to base the award
and there is need for further proceedings in the lower court to
ascertain the proper amount.
PREMISES CONSIDERED, the judgment appealed from is
hereby modified as follows:
1. The sale of the two certificates of public convenience in
question by Valentin Fernando to Villa Rey Transit, Inc. is
declared preferred over that made by the Sheriff at public auction
of the aforesaid certificate of public convenience in favor of
Eusebio Ferrer;
2. Reversed, insofar as it dismisses the third-party complaint filed
by Pangasinan Transportation Co. against Jose M. Villarama,
holding that Villa Rey Transit, Inc. is an entity distinct and
separate from the personality of Jose M. Villarama, and insofar as
it awards the sum of P5,000.00 as attorney's fees in favor of Villa
Rey Transit, Inc.;
3. The case is remanded to the trial court for the reception of
evidence in consonance with the above findings as regards the
amount of damages suffered by Pantranco; and
4. On equitable considerations, without costs. So ordered.

Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of
defendants (Pantranco and Ferrer) in acquiring the certificates of

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CORPORATION LAW | 142

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17618

August 31, 1964

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
NORTON and HARRISON COMPANY, respondent.
1. CORPORATIONS; DOCTRINE OF PIERCING VEIL OF
CORPORATE FICTION; CIRCUMSTANCES OF CASE AT BAR.
The circumstances of the case at bar where: (a) N. corporation
owned all the outstanding stocks of J. corporation; (b) the board
of directors of N. corporation is constituted in such a way to
enable it to actually direct and manage the other corporations
affairs by making the same officers of the board for both
companies; (c) N. corporation financed the operation of the other;
(d) N corporation treats the others employees as its own; (e)
compensation given to board members of J. corporation, who are
also board members and/or employees of N indicate that J is only
a department: of N; and (f) the offices of both corporations are
located in the same compound; all lead to the conclusion that J
corporation is merely an adjunct, business conduit or alter ego of
N corporation and that the action of separate and distinct
corporate entities should be disregarded.
2. TAXATION; CORPORATE FICTION MAY NOT BE USED TO
EVADE TAXES. The revenue officers, in proper cases, may
disregard the separate corporate entity where it serves but as a
shield for tax evasion.
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.

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CORPORATION LAW | 143

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, 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.

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. ... .

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.

xxx

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

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,

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CORPORATION LAW | 144

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

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CORPORATION LAW | 145

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.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 108734 May 29, 1996
CONCEPT BUILDERS, INC., petitioner,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION, (First
Division); and Norberto Marabe; Rodolfo Raquel, Cristobal
Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar,
Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr.,
Mariano Rio, Paulina Basea, Alfredo Albera, Paquito Salut,
Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe
Radiana, Gavino Sualibio, Moreno Escares, Ferdinand
Torres, Felipe Basilan, and Ruben Robalos, respondents.
1. COMMERCIAL LAW; CORPORATION LAW; DOCTRINE OF
PIERCING THE VEIL OF CORPORATE ENTITY; WHEN
APPLICABLE. It is a fundamental principle of corporation law
that a corporation is an entity separate and distinct from its
stockholders and from other corporations to which it may be
connected. But, this separate and distinct personality of a
corporation is merely a fiction created by law for convenience and
to promote justice. So when the notion of separate juridical
personality is used to defeat public convenience, justify wrong,
protect fraud or defend crime, or is used as a device to defeat the
labor laws, this separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced. This is true
likewise when the corporation is merely an adjunct, a business
conduit or an alter ego of another corporation.
2. ID.; ID.; ID.; PROBATIVE FACTORS OF IDENTITY THAT WILL
JUSTIFY THE APPLICATION THEREOF. The conditions under
which the juridical entity may be disregarded vary according to the
peculiar facts and circumstances of each case. No hard and fast
rule can be accurately laid down, but certainly, there are some
probative factors of identity that will justify the application of the
doctrine of piercing the corporate veil, to wit: "1. Stock ownership
by one or common ownership of both corporations. 2. Identity of
directors and officers. 3. The manner of keeping corporate books
and records. 4. Methods of conducting the business."cralaw
virtua1aw library
3. ID.; ID.; ID.; TEST IN DETERMINING THE APPLICABILITY
THEREOF. The test in determining the applicability of the
doctrine of piercing the veil of corporation fiction is as follows: "1.
Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business
practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate
mind, will or existence of its own; 2. Such control must have been
used by the defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of 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 prevent 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
operation."cralaw
virtua1aw
library

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CORPORATION LAW | 146

4. ID.; ID.; ID.; APPLICABLE IN CASE AT BAR. In this case,

the NLRC noted that, while petitioner claimed that it ceased its
business operations on April 29, 1986, it filed an Information
Sheet with the Securities and Exchange Commission on May 15,
1987, stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila. On the other hand, HPPI, the thirdparty claimant, submitted on the same day, a similar information
sheet stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila. Furthermore, the NLRC stated that:
"Both information sheets were filed by the same Virgilio 0. Casio
as the corporate Secretary of both corporations. It would also not
be amiss to note that both corporations had the same president,
the same board of directors, the same corporate officers, and
substantially the same subscribers. From the foregoing, it appears
that, among other things, the respondent (herein petitioner-) and
the third-party claimant shared the same address an/or premises.
Under this circumstances, (sic) it cannot be said that the property
levied upon by the sheriff were not of respondents." Clearly,
petitioner ceased its business operations in order to evade the
payment to private respondents of back wages and to bar their
reinstatement to their former positions. HPPI is obviously a
business conduit of petitioner corporation and its emergence was
skillfully orchestrated to avoid the financial liability that already
attached to petitioner corporation
5. ID.; NATIONAL LABOR RELATIONS COMMISSION MANUAL
OF EXECUTION OF JUDGMENT; SECTION 3, RULE VII
THEREOF; PROPERLY OBSERVED IN CASE AT BAR. In
view of the failure of the sheriff, in the case at bar, to effect a levy
upon the property subject of the execution, private respondents
had no other recourse but to apply for a break-open order after
the third-party claim of HPPI was dismissed for lack of merit by
the NLRC. This is in consonance with Section 3, Rule VII of the
NLRC Manual of Execution of Judgment which provides that:
"Should the losing party, his grant or representative, refuse or
prohibit the Sheriff or his representative entry to the place where
the property subject of execution is located or kept, the judgment
creditor may apply to the Commissioner or Labor Arbiter
concerned for a break-open order."

HERMOSISIMA, JR., J.:p

The corporate mask may be lifted and the corporate veil may be
pierced when a corporation is just but the alter ego of a person or
of another corporation. Where badges of fraud exist; where public
convenience is defeated; where a wrong is sought to be justified
thereby, the corporate fiction or the notion of legal entity should
come to naught. The law in these instances will regard the
corporation as a mere association of persons and, in case of two
corporations, merge them into one.
Thus, where a sister corporation is used as a shield to evade a
corporation's subsidiary liability for damages, the corporation may
not be heard to say that it has a personality separate and distinct
from the other corporation. The piercing of the corporate veil
comes into play.
This special civil action ostensibly raises the question of whether
the National Labor Relations Commission committed grave abuse
of discretion when it issued a "break-open order" to the sheriff to
be enforced against personal property found in the premises of
petitioner's sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with
principal office at 355 Maysan Road, Valenzuela, Metro Manila, is

engaged in the construction business. Private respondents were

employed by said company as laborers, carpenters and riggers.
On November, 1981, private respondents were served individual
written notices of termination of employment by petitioner,
effective on November 30, 1981. It was stated in the individual
notices that their contracts of employment had expired and the
project in which they were hired had been completed.
Public respondent found it to be, the fact, however, that at the
time of the termination of private respondent's employment, the
project in which they were hired had not yet been finished and
completed. Petitioner had to engage the services of subcontractors whose workers performed the functions of private
respondents.
Aggrieved, private respondents filed a complaint for illegal
dismissal, unfair labor practice and non-payment of their legal
holiday pay, overtime pay and thirteenth-month pay against
petitioner.
On December 19, 1984, the Labor Arbiter rendered judgment 1
ordering petitioner to reinstate private respondents and to pay
them back wages equivalent to one year or three hundred
working days.
On November 27, 1985, the National Labor Relations
Commission (NLRC) dismissed the motion for reconsideration
filed by petitioner on the ground that the said decision had already
become final and executory. 2
On October 16, 1986, the NLRC Research and Information
Department made the finding that private respondents' back
wages amounted to P199,800.00. 3
On October 29, 1986, the Labor Arbiter issued a writ of execution
directing the sheriff to execute the Decision, dated December 19,
1984. The writ was partially satisfied through garnishment of
sums from petitioner's debtor, the Metropolitan Waterworks and
Sewerage Authority, in the amount of P81,385.34. Said amount
was turned over to the cashier of the NLRC.
On February 1, 1989, an Alias Writ of Execution was issued by
the Labor Arbiter directing the sheriff to collect from herein
petitioner the sum of P117,414.76, representing the balance of
the judgment award, and to reinstate private respondents to their
former positions.
On July 13, 1989, the sheriff issued a report stating that he tried
to serve the alias writ of execution on petitioner through the
security guard on duty but the service was refused on the ground
that petitioner no longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the
Labor Arbiter issued a second alias writ of execution.
The said writ had not been enforced by the special sheriff
because, as stated in his progress report, dated November 2,
1989:
1. All the employees inside petitioner's premises at 355 Maysan
Road, Valenzuela, Metro Manila, claimed that they were
employees of Hydro Pipes Philippines, Inc. (HPPI) and not by
respondent;

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CORPORATION LAW | 147

2. Levy was made upon personal properties he found in the

premises;

Elisa C. Lim Member

Teodulo R. Dino Member

3. Security guards with high-powered guns prevented him from

removing the properties he had levied upon. 4
The said special sheriff recommended that a "break-open order"
be issued to enable him to enter petitioner's premises so that he
could proceed with the public auction sale of the aforesaid
personal properties on November 7, 1989.

Virgilio
Member

O.

Casino

3. Corporate Officers
Antonio W. Lim President

On November 6, 1989, a certain Dennis Cuyegkeng filed a thirdparty claim with the Labor Arbiter alleging that the properties
sought to be levied upon by the sheriff were owned by Hydro
(Phils.), Inc. (HPPI) of which he is the Vice-President.
On November 23, 1989, private respondents filed a "Motion for
Issuance of a Break-Open Order," alleging that HPPI and
petitioner
corporation
were
owned
by
the
same
incorporator/stockholders. They also alleged that petitioner
temporarily suspended its business operations in order to evade
its legal obligations to them and that private respondents were
willing to post an indemnity bond to answer for any damages
which petitioner and HPPI may suffer because of the issuance of
the break-open order.
In support of their claim against HPPI, private respondents
presented duly certified copies of the General Informations Sheet,
dated May 15, 1987, submitted by petitioner to the Securities
Exchange Commission (SEC) and the General Information Sheet,
dated May 25, 1987, submitted by HPPI to the Securities and
Exchange Commission.
The General Information Sheet submitted by the petitioner
revealed the following:

Dennis S.
Assistant
President

Cuyegkeng
to
the

Elisa O. Lim Treasurer

Virgilio
O.
Casino
Corporate Secretary
4. Principal Office
355 Maysan Road
Valenzuela,
Manila. 5

Metro

On the other hand, the General Information Sheet of HPPI

revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder
Amount Subscribed

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

Antonio W.
400,000.00

Lim

HPPI P 6,999,500.00
Elisa C. Lim 57,700.00
Antonio
W.
2,900,000.00
Dennis
300.00

S.

Lim
AWL Trading 455,000.00

Cuyegkeng

Dennis S.
40,100.00

Cuyegkeng

Elisa C. Lim 100,000.00

Teodulo R. Dino 100.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

2. Board of Directors
Antonio
Chairman

Antonio
Chairman

W.

Dennis S.
Member

Cuyegkeng

W.

Lim

Lim
Elisa C. Lim Member
Dennis S.
Member

Cuyegkeng

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CORPORATION LAW | 148

Virgilio
Member

O.

Casino

Teodulo R. Dino Member

3. Corporate Officers
Antonio W. Lim President
Dennis S.
Assistant
President

Cuyegkeng
to
the

Elisa C. Lim Treasurer

Virgilio
O.
Casino
Corporate Secretary

It is a fundamental principle of corporation law that a corporation

is an entity separate and distinct from its stockholders and from
other corporations to which it may be connected. 8 But, this
separate and distinct personality of a corporation is merely a
fiction created by law for convenience and to promote justice. 9
So, when the notion of separate juridical personality is used to
defeat public convenience, justify wrong, protect fraud or defend
crime, or is used as a device to defeat the labor laws, 10 this
separate personality of the corporation may be disregarded or the
veil of corporate fiction pierced. 11 This is true likewise when the
corporation is merely an adjunct, a business conduit or an alter
ego of another corporation. 12
The conditions under which the juridical entity may be
disregarded vary according to the peculiar facts and
circumstances of each case. No hard and fast rule can be
accurately laid down, but certainly, there are some probative
factors of identity that will justify the application of the doctrine of
piercing the corporate veil, to wit:
1. Stock ownership by one or common
ownership of both corporations.

4. Principal Office
355
Maysan
Valenzuela,
Manila. 6

Road,
Metro

On February 1, 1990, HPPI filed an Opposition to private

respondents' motion for issuance of a break-open order,
contending that HPPI is a corporation which is separate and
distinct from petitioner. HPPI also alleged that the two
corporations are engaged in two different kinds of businesses,
i.e., HPPI is a manufacturing firm while petitioner was then
engaged in construction.
On March 2, 1990, the Labor Arbiter issued an Order which
denied private respondents' motion for break-open order.
Private respondents then appealed to the NLRC. On April 23,
1992, the NLRC set aside the order of the Labor Arbiter, issued a
break-open order and directed private respondents to file a bond.
Thereafter, it directed the sheriff to proceed with the auction sale
of the properties already levied upon. It dismissed the third-party
claim for lack of merit.
Petitioner moved for reconsideration but the motion was denied
by the NLRC in a Resolution, dated December 3, 1992.
Hence, the resort to the present petition.
Petitioner alleges that the NLRC committed grave abuse of
discretion when it ordered the execution of its decision despite a
third-party claim on the levied property. Petitioner further
contends, that the doctrine of piercing the corporate veil should
not have been applied, in this case, in the absence of any
showing that it created HPPI in order to evade its liability to
private respondents. It also contends that HPPI is engaged in the
manufacture and sale of steel, concrete and iron pipes, a
business which is distinct and separate from petitioner's
construction business. Hence, it is of no consequence that
petitioner and HPPI shared the same premises, the same
President and the same set of officers and subscribers. 7

2. Identity of directors and officers.

3. The manner of keeping corporate books
and records.
4. Methods of conducting the business. 13
The SEC en banc explained the "instrumentality rule" which the
courts have applied in disregarding the separate juridical
personality of corporations as follows:
Where one corporation is so organized and
controlled and its affairs are conducted so
that it is, in fact, a mere instrumentality or
adjunct of the other, the fiction of the
corporate entity of the "instrumentality" may
be disregarded. The control necessary to
invoke the rule is not majority or even
complete stock control but such domination
of instances, policies and practices that the
controlled corporation has, so to speak, no
separate mind, will or existence of its own,
and is but a conduit for its principal. It must
be kept in mind that the control must be
shown to have been exercised at the time the
acts complained of took place. Moreover, the
control and breach of duty must proximately
cause the injury or unjust loss for which the
complaint is made.
The test in determining the applicability of the doctrine of piercing
the veil of corporate fiction is as follows:
1. Control, not mere majority or complete
stock control, but complete domination, not
only of finances but of policy and business
practice in respect to the transaction attacked
so that the corporate entity as to this
transaction had at the time no separate mind,
will or existence of its own;

We find petitioner's contention to be unmeritorious.

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2. Such control must have been used by the

defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other
positive legal duty or dishonest and unjust act
in contravention of plaintiff's legal rights; and

latter finally ceased to operate, were not

disputed by petitioner. It is very clear that the
latter corporation was a continuation and
successor of the first entity . . . . Both
predecessors and successor were owned
and controlled by petitioner Eduardo
Claparols and there was no break in the
succession and continuity of the same
business. This "avoiding-the-liability" scheme
is very patent, considering that 90% of the
subscribed shares of stock of the Claparols
Steel Corporation (the second corporation)
was owned by respondent . . . Claparols
himself, and all the assets of the dissolved
Claparols Steel and Nail plant were turned
over to the emerging Claparols Steel
Corporation.

3. The aforesaid control and breach of duty

must proximately cause the injury or unjust
loss complained of.
The absence of any one of these elements
prevents "piercing the corporate veil." In
applying the "instrumentality" or "alter ego"
doctrine, the courts are concerned with reality
and not form, with how the corporation
operated and the individual defendant's
relationship to that operation. 14

It is very obvious that the second corporation

seeks the protective shield of a corporate
fiction whose veil in the present case could,
and should, be pierced as it was deliberately
and maliciously designed to evade its
financial obligation to its employees.

Thus the question of whether a corporation is a mere alter ego, a

mere sheet or paper corporation, a sham or a subterfuge is purely
one of fact. 15
In this case, the NLRC noted that, while petitioner claimed that it
ceased its business operations on April 29, 1986, it filed an
Information Sheet with the Securities and Exchange Commission
on May 15, 1987, stating that its office address is at 355 Maysan
Road, Valenzuela, Metro Manila. On the other hand, HPPI, the
third-party claimant, submitted on the same day, a similar
information sheet stating that its office address is at 355 Maysan
Road, Valenzuela, Metro Manila.

In view of the failure of the sheriff, in the case at bar, to effect a

levy upon the property subject of the execution, private
respondents had no other recourse but to apply for a break-open
order after the third-party claim of HPPI was dismissed for lack of
merit by the NLRC. This is in consonance with Section 3, Rule VII
of the NLRC Manual of Execution of Judgment which provides
that:

Furthermore, the NLRC stated that:

Both information sheets were filed by the
same Virgilio O. Casio as the corporate
secretary of both corporations. It would also
not be amiss to note that both corporations
had the same president, the same board of
directors, the same corporate officers, and
substantially the same subscribers.
From the foregoing, it appears that, among
other things, the respondent (herein
petitioner) and the third-party claimant shared
the same address and/or premises. Under
this circumstances, (sic) it cannot be said that
the property levied upon by the sheriff were
not of respondents. 16
Clearly, petitioner ceased its business operations in order to
evade the payment to private respondents of back wages and to
bar their reinstatement to their former positions. HPPI is obviously
a business conduit of petitioner corporation and its emergence
was skillfully orchestrated to avoid the financial liability that
already attached to petitioner corporation.
The facts in this case are analogous to Claparols v. Court of
Industrial Relations, 17 where we had the occasion to rule:

Should the losing party, his agent or

representative, refuse or prohibit the Sheriff
or his representative entry to the place where
the property subject of execution is located or
kept, the judgment creditor may apply to the
Commission or Labor Arbiter concerned for a
break-open order.
Furthermore, our perusal of the records shows that the twin
requirements of due notice and hearing were complied with.
Petitioner and the third-party claimant were given the opportunity
to submit evidence in support of their claim.
Hence, the NLRC did not commit any grave abuse of discretion
when it affirmed the break-open order issued by the Labor Arbiter.
Finally, we do not find any reason to disturb the rule that factual
findings of quasi-judicial agencies supported by substantial
evidence are binding on this Court and are entitled to great
respect, in the absence of showing of grave abuse of a discretion.
18

WHEREFORE, the petition is DISMISSED and the assailed

resolutions of the NLRC, dated April 23, 1992 and December 3,
1992, are AFFIRMED.
SO ORDERED.

Respondent court's findings that indeed the

Claparols Steel and Nail Plant, which ceased
operation of June 30, 1957, was
SUCCEEDED by the Claparols Steel
Corporation effective the next day, July 1,
1957, up to December 7, 1962, when the

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Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 117963 February 11, 1999

AZCOR MANUFACTURING INC., FILIPINAS PASO and/or
ARTURO ZULUAGA/Owner, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION (NLRC) AND
CANDIDO CAPULSO, respondents.

BELLOSILLO, J.:
AZCOR MANUFACTURING, INC., Filipinas Paso and Arturo
Zuluaga instituted this petition for certiorari under Rule 65 of the
Rules of Court to assail, for having been rendered with grave
abuse of discretion amounting to lack or excess of jurisdiction, the
Decision of the National Labor Relations Commission which
reversed the decision of the Labor Arbiter dismissing the
complaint of respondent Candido Capulso against petitioners. 1
Candido Capuslo file with the Labor Arbiter a complaint for
constructive illegal dismissal and illegal deduction of P50.00 per
day for the period April to September 1989. Petitioners Azcor
Manufacturing, Inc. (AZCOR) and Arturo Zuluaga who were
respondents before the Labor Arbiter (Filipinas Paso was not yet
a party then in that case) moved to dismiss the complaint on the
ground that there was no employer-employee relationship
between AZCOR and herein respondent Capulso; .that the latter
became an employee of Filipinas Paso effective 1 March 1996 but
voluntarily resigned there from a year after, Capulso later
amended his complaint by impleading Filipinas Paso as additional
respondent before the Labor Arbiter.
On 14 January 1592, Labor Arbiter Felipe T. Garduque II denied
the motion to dismiss holding that the allegation of lack of
employer-employee relationship between Capulso and AZCOR
was not clearly established. Thereafter, the Labor Arbiter ordered
that hearings be conducted for the presentation of evidence by
both parties.
The evidence presented by Capulso showed that he worked for
AZCOR as ceramics worker for more than two (2) years starting
from 3 April 1989 to 1 June 1991 receiving a daily wage of
P118.00 plus other benefits such as vacation and sick leaves.
From April to September 1989 the amount of P50.00 was
deducted from his salary without informing him of the reason
therefor.
In the second week of February 1991, upon his doctor's
recommendation, Capulso verbally requested to go on sick leave
due to bronchial asthma. It appeared that his illness was, directly
caused by his job as ceramics worker where, for lack of the
prescribed occupational safety gadgets, he inhaled and absorbed
harmful ceramic dusts. His supervisor, Ms. Emily Apolinaria,
approved his request. Later, on 1 June 1991, Capulso went back
to petitioner AZCOR to resume his work after recuperating from

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his illness. He was not allowed to do so by his supervisors who

informed him that only the owner, Arturo Zuluaga, could allow him
to continue in his job. He returned five (5) times to AZCOR but
when it became apparent that he would not be reinstated, he
immediately filed the instant complaint for illegal dismissal. 2
Capulso presented the following documentary evidence in support
of his claim: (a) His affidavit and testimony to prove that he was
terminated without just cause and without due process; 3 (b)
Identification card issued by AZCOR which he continued to use
even after his supposed employment by Filipinas Paso; 4 (c)
Certification of SSS premium payments; 5 (d) SSS Member
Assistance Form wherein he stated that he worked with AZCOR
from March 1989 to April 1991; 6 (e) Certification of Employee
Contribution with SSS; 7 and, (f) Payslips issued by AZCOR. 8
On the other hand, petitioners alleged that Capulso was a former
employee of AZCOR who resigned on 28 February 1990 as
evidenced by a letter of resignation and joined Filipinas Paso on 1
March 1990 as shown by a contract of employment; in February
1991 Capulso allegedly informed his supervisor, Ms. Emilia
Apolinaria, that he intended to go on terminal leave because he
was not feeling well; on 1 March 1991 he submitted a letter of
resignation addressed to the President of Filipinas Paso, Manuel
Montilla; and, in the early part of June 1991 Capulso tried to apply
for work again with Filipinas Paso but there was no vacancy.
Petitioners submitted the following documentary evidence: (a)
Sworn Statement of Ms. Emilia Apolinaria and her actual
testimony to prove that respondent indeed resigned voluntarily
from AZCOR to transfer to Filipinas Paso, and thereafter, from
Filipinas Paso hug to failing health; 9 (b) Contract of Employment
between Filipinas Paso and respondent which took effect 1 March
1991; 10 (c) Letter of resignation of respondent from AZCOR dated
28 February 1990, to take effect on the same date; 11 (d) Undated
letter of resignation of respondent addressed to Filipinas Paso to
take effect 1 March 1991; 12 (e) BIR Form No. W-4 filed 6 June
1990; 13 (f) Individual Income Tax Return of respondent for 1990;
14
and, (g) BIR Form 1701-B which was an alphabetical list of
employees of Filipinas Paso for the year ending 31 December
1990. 15
On 29 December 1992 the Labor Arbiter rendered a decision
dismissing the complaint for illegal dismissal for lack of merit, but
ordered AZCOR and/or Arturo Zuluaga to refund to Capulso the
sum of P200.00 representing the amount illegally deducted from
his salary.
On appeal by Capulso, docketed as NLRC CA No. 004476-93
(NLRC NCR 00-09-05271-91), "Capulso v. Azcor Manufacturing
Inc., Filipinas Paso and/or Arturo Zuluaga/owner," the NLRC
modified the Labor Arbiter's decision by: (a) declaring the
dismissal of Capulso as illegal for lack of just and valid cause; (b)
ordering petitioners to reinstate Capulso to his former or
equivalent position without loss of Seniority rights and without
diminution of benefits, and, (c) ordering petitioners to jointly and
solidarily pay Capulso his backwages computed from the time of
his dismissal up to the date of his actual reinstatement. The
NLRC held in part. . . . the contract of employment (Exh. 2, p.
187, Rollo) issued to complainant indicates
that the work to be done during the period
was contracted with Filipinas Paso. The said
contract was signed by, the Personnel Officer
of Ascor Manufacturing Inc. Likewise, the
contract period is for six (6) months, which

establishes a presumption that the said

contract could pass either as to cover the
probationary period, or job contracting, the
completion of which automatically terminates
employment, whichever will work to
respondent's advantage should the case be
filed. However, appellant continued working
with respondent after the lapse of the
contract and until the alleged termination of
employment of appellant.
Secondly, the two resignation letters allegedly
executed by appellant are exactly worded,
which only shows that the same work were
prepared by respondents-appellees plus after
the fact that complainant denied having
executed and signed the same.
. . . . the letter of resignation (Exh. "3", p. 188,
Rollo) supposed to have been executed by
complainant-appellant
shows
that
he
resigned from Ascor Mfg., Inc. on February
28, 1990 while Exhibit "2", page 187, Rollo,
which was the contract of Employment issued
to Candido Capulso by the personnel officer
of Ascor Mfg., Inc. shows that appellant was
being hired from March 1, 1990 to August 31,
1990 by respondent Ascor Mfg., Inc. to do
jobs for Filipinas Paso; A run-around of
events and dates.
The events that transpired clearly show that
there was no interruption in the service of
complainant with Ascor Mfg., Inc. from April
13 1989 up to June 1, 1991 when
complainant
was
unceremoniously
dismissed.
Considering that Ascor Mfg., Inc. and
Filipinas Paso orchestrated the events that
appeared to be in order with the alleged
execution of resignation letters which was
disputed by complainant and confirmed
spurious as explained above, likewise
overwhelmingly show the bad faith of
respondents in the treatment of their
employees.
Petitioners' motion for reconsideration was denied by the NLRC
through its Resolution of 14 October 1994; hence, the instantpetition. Meanwhile, during the pendency of the case before this
Court, Capulso succumbed to asthma and heart disease.
The issue to be resolved is whether the NLRC committed grave
abuse of discretion in declaring that private respondent Capulso
was illegally dismissed and in holding petitioners jointly and
solidarily liable to Capulso for back wages.
As a rule the original and exclusive jurisdiction to review a
decision or resolution of respondent NLRC in a petition for
certiorari under Rule 65 of the Rules of Court does not include a
correction of its evaluation of the evidence but is confined to
issues of jurisdiction or grave abuse of discretion. The NLRC
factual findings, if supported by substantial evidence, are entitled
to great respect and even finality, unless petitioner is able to show
that it simply and arbitrarily disregarded the evidence before it or

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had misappreciated the evidence to such an extent as to compel

a contrary conclusion if such evidence had been properly
appreciated. 16 We find no cogent reason to disturb the findings of
the NLCR.
Petitioners insist that Capulso was not really dismissed but he
voluntarily resigned from AZCOR and Filipinas Paso, and that
there was nothing illegal or unusual in the letters of resignation he
executed.
We disagree. To constitute a resignation, it must be unconditional
and with the intent to operate as such. There must be an intention
to relinquish a portion of the term of office accompanied by an act
of relinquishment. 17 In the instant case, the fact that Capulso
signified his desire to resume his work when he went back to
petitioner AZCOR after recuperating from his illness, and actively
pursued his case for illegal dismissal before the labor courts when
he was refused admission by his employer, negated any intention
on his part to relinquish his job at AZCOR.
Moreover, a closer look at the subject resignation letters readily
reveals the following: (a) the resignation letter allegedly tendered
by Capulso to Filipinas Paso was identically worded with that
supposedly addressed by him to AZCOR; (b) both were predrafted with blank spaces filled up with the purported dates of
effectivity of his resignation; and, (c) it was written in English, a
language which Capulso was not conversant with considering his
low level of education. No other plausible explanation can be
drawn from these circumstances than that the subject letters of
resignation were prepared by a person or persons other than
Capulso. And the fact that he categorically disowned the
signatures therein and denied having executed them clearly
indicates that the resignation letters were drafted, without his
consent and participation.
Even assuming for the sake of argument that the signatures were,
genuine, we still cannot give credence to those letters in the
absence of any showing that Capulso was aware that what he
was signing then were in fact resignation letters or that he fully
understood the contents thereof. Having introduced those
resignation letters in evidence, it was incumbent upon petitioners
to prove clearly and convincingly their genuineness and due
execution, especially considering the serious doubts an their
authenticity. Petitioners miserably failed in this respect.
The Labor Arbiter held that Capulso's repudiation of the
signatures affixed in the letters of resignation was weakened by
the fact that he filed the case only after almost four (4) months
from the date of his dismissal. But it should be noted that private
respondent still wanted his job and thus, understandably,
refrained from filing the illegal dismissal case against his
employer so as not to jeopardize his chances of continuing with
his employment. True enough, when it became apparent that he
was no longer welcome at AZCOR he immediately instituted the
instant case.
In addition, an action for reinstatement by reason of illegal
dismissal is one based on an injury which may be brought within
four (4) years from the time of dismissal pursuant to Art. 1146 of
the Civil Code. Hence, Capulso's case which was filed after a
measly delay of four (4) months should not be treated with
skepticism or cynicism. By law and settled jurisprudence, he has
four (4) years to file his complaint for illegal dismissal. A delay of
merely four (4) months in instituting an illegal dismissal case is
more than sufficient compliance with the prescriptive period. It
may betray an unlettered man's lack of awareness of his rights as

a lowly worker but, certainly, he must not be penalized for his

tarrying.
In illegal dismissal cases like the present one, the onus of proving
that the dismissal of the employee was for a valid and authorized
cause rests on the employer 18 and failure to discharge the same
would mean that the dismissal is not justified and therefore illegal.
19
Petitioners failed in this regard.
Petitioners also contend that they could not be held jointly and
severally liable to Capulso for back wages since AZCOR and
Filipinas Paso are separate and distinct corporations with different
corporate personalities; and, the mere fact that the businesses of
these corporations are interrelated and both owned and controlled
by a single stockholder are not sufficient grounds to disregard
their separate corporate entities.
We are not persuaded. The doctrine that a corporation is a legal
entity or a person in law distinct from the persons composing it is
merely a legal fiction for purposes of convenience and to
subserve the ends of justice. This fiction cannot be extended to a
point beyond its reason and policy. 20 Where, as in this case, the
corporate fiction was used as a means to perpetrate a social
injustice or as a vehicle to evade obligations or confuse the
legitimate issues, it would be discarded and the two (2)
corporations would be merged as one, the first being merely
considered as the instrumentality, agency, conduit or adjunct of
the other. 21
In this particular case, there was much confusion as to the identity
of Capulso's employer - whether it was AZCOR or Filipinas Paso;
but, for sure, it was petitioners' own making, as shown by the
following: First, Capulso had no knowledge that he was already
working under petitioner Filipinas Paso since he contained to
retain his AZCOR Identification card; Second, his payslips
contained the name of AZCOR giving the impression that AZCOR
was paying his salary; Third, he was paid the same salary and he
performed the same kind of job, in the same work area, in the
same location, using the same tools and under the same
supervisor; Fourth, there was no gap in his employment as he
continued to work from the time he was hired up to the last day of
his work; Fifth, the casting department of AZCOR where Capulso
was working was abolished when he, together with six (6) others,
transferred to Filipinas Paso; and Sixth, the employment contract
was signed by an AZCOR personnel officer, which showed that
Capulso was being hired from 1 March 1990 to 31 August 1990
by AZCOR to do jobs for Filipinas Paso. The employment contract
provided in part:
The contract is for a specific job contract only
and shall be effective for the period covered,
unless sooner terminated when the job
contract is completed earlier or withdrawn by
client, or when the employee is dismissed for
just and lawful causes provided by law and
the company's rules and regulations, in which
case
the
employment
contract
will
automatically terminate.
As correctly observed by the NLRC, the contract was only for six
(6) months, which could pass either as a probationary period or a
job contracting, the completion of which automatically terminated
the employment. Observe further, however, that respondent
continued working even after the lapse of the period in the
contract - for whom it was not clear. It may be asked: Was the six
(6)-month period probationary in nature, in which case, after the
lapse of the period he became a regular employee of Filipinas

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Paso? Or was the period job-contracting in character, in which

case, after the period he was deemed to have come back to
AZCOR?

Republic of the Philippines

SUPREME COURT
Manila

Interestingly, petitioners likewise argue that it was grave abuse of

discretion for the NLRC to hold them solidarily, liable to Capulso
when the latter himself testified that he was not even an employee
of Filipinas Paso. 22 After causing much confusion, petitioners
have the temerity to use as evidence the ignorance of Capulso in
identifying his true employer. It is evident from the foregoing
discussion that Capulso was led into believing that while he was
working with Filipinas Paso, his real employer was AZCOR.
Petitioners never dealt with him openly and in good faith, nor was
he informed of the developments within the company, i.e., his
alleged transfer to Filipinas Paso and the closure of AZCOR's
manufacturing operations beginning 1 March 1990. 23
Understandably, he sued AZCOR alone and was constrained to
implead Filipinas Paso as additional respondent only when it
became apparent that the latter also appeared to be his employer.

FIRST DIVISION

In fine, we see in the totality of the evidence a veiled attempt by

petitioners to deprive Capulso of what he had earned through
hard labor by taking advantage of his low level of education and
confusing. him as to who really was his true employer - such a
callous and despicable treatment of a worker who had rendered
faithful service to their company.
However, considering that private respondent died during the
pendency of the case before this Court, reinstatement is no longer
feasible. In lieu thereof, separation pay shall be awarded. With
respect to the amount of back wages, it shall be computed from
the time of private respondent's illegal dismissal up to the time of
his death.
WHEREFORE, the petition is DISMISSED. The NLRC Decision of
12 September 1994 is MODIFIED. Petitioners AZCOR
MANUFACTURING, INC., FILIPINAS PASO and ARTURO
ZULUAGA are ORDERED to pay, jointly and solidarily, the heirs
of private respondent Candido Capulso the amounts representing
his back wages, inclusive of allowances and other benefits, and
separation pay to, be computed in accordance with law.
SO ORDERED.

G.R. No. L-28694 May 13, 1981

TELEPHONE ENGINEERING & SERVICE COMPANY, INC.,
petitioner,
vs.
WORKMEN'S COMPENSATION COMMISSION, PROVINCIAL
SHERIFF OF RIZAL and LEONILA SANTOS GATUS, for
herself and in behalf of her minor children, Teresita, Antonina
and Reynaldo, all surnamed GATUS, respondents.
SYNOPSIS
Pacifico L. Gatus, a purchasing agent of Utilities Management
Corporation (UMACOR), detailed in the Telephone and
Equipment Services Co., Inc. (TESCO), a sister company of the
former and petitioner herein, contracted "liver cirrhosis with
malignant degeneration" which caused his death. The Acting
Referee awarded death benefits and burial expenses to be paid
by TESCO, on the basis of uncontroverted claim for
compensation, filed by the widow of the deceased and an
admission by the TESCO that the illness was contracted "in
regular occupation." A motion for reconsideration and/or petition
to set aside the award filed by the petitioner was denied. Before
an order could be issued by the Workmens Compensation
Commission on petitioners motion to elevate the records of the
case, petitioner filed with this Court a petition for" Certiorari with
Preliminary Injunction," contending that the Commission has no
jurisdiction to render a valid award, there being no employeremployee relationship between the petitioner and private
respondents.
The Supreme Court ruled that the lack of employer-employee
relationship is a matter of defense that should properly be raised
in the Workmens Compensation Commission and cannot be
raised for the first time on appeal, as the determination of such
relationship involving a finding of fact, is conclusive and binding
and not subject to review by this Court.
Petition dismissed.

SYLLABUS

1. LABOR AND SOCIAL LEGISLATION; WORKMENS

COMPENSATION
ACT;
EMPLOYER-EMPLOYEE
RELATIONSHIP; BASIC PRINCIPLES. A few basic principles
should be re-stated: the existence of employer-employee
relationship is the jurisdictional foundation for recovery of
compensation under the Workmens Compensation Law
(Madrigal Shipping Co. v. Melad, 7 SCRA 330 [1963]), The lack of
employer-employee relationship, however, is a matter of defense
that the employer should properly raise in the proceedings below.
The determination of this relationship involves a finding of fact,
which is conclusive and binding and not subject to review by this
Court (Abong v. WCC, 54 SCRA 379 [1973]).
2. ID.; ID.; ID.; UNTIMELY DENIAL OF RELATIONSHIP IN CASE
AT BAR. While, indeed, jurisdiction cannot be conferred by
acts or omission of the parties, TESCOs denial at this stage that
it is the employer of the deceased is obviously an afterthought, a
devise to defeat the law and evade its obligations. In fact, in its

VOLENTI NON FIT INJURIA

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letter dated October 27, 1967 to the Acting Referee, in its request
for extension of time to file Motion for Reconsideration, in its
"Motion for Reconsideration and/or Petition to Set Aside Award,"
and in its "Urgent Motion to Compel the Referee to Elevate
Records to the Commission for Review," petitioner represented
and defended itself as the employer of the deceased. Nowhere in
said documents did it allege that it was not the employer and
petitioner even admitted that TESCO and UMACOR are sister
companies operating under one single management and housed
in the same building. This denial also constitutes a change of
theory on appeal which is not allowed in this jurisdiction (Carantes
v. Court of Appeals 76 SCRA 514 [1977]). Moreover, issues not
raised before the Workmens Compensation Commission cannot
be raised for the first time on appeal (Buenaventura vs, WCC, 76
SCRA 485 [1977]). For that matter, a factual question may not be
raised for the first time on appeal to the Supreme Court
(Gonzales-Precilla v. Rosario, 33 SCRA 228 [1970]).
3. COMMERCIAL LAW; CORPORATION LAW; WHEN VEIL OF
CORPORATE FICTION MAY BE PIERCED. Although respect
for the corporate personality as such, is the general rule, there are
exceptions. In appropriate cases, the veil of corporate fiction may
be pierced as when the same is made as a shield to confuse the
legitimate issues.
4. REMEDIAL LAW; SPECIAL CIVIL ACTION; CERTIORARI;
WHEN PREMATURE. Certiorari cannot be resorted to when
the remedy of appeal is present (Fernando v. Vasques. 31 SCRA
288 [1970] and certiorari will not lie, it being prematurely filed
where petitioner had not utilized the remedies available to it under
Rules 23, 24 and 25 of the Rules of the Workmens
Compensation Commission, namely. an appeal from the award of
the Referee, within fifteen days from notice, to the Commission; a
petition for reconsideration of the latters resolution, if adverse, to
the Commission en banc; and within ten days from receipt of an
unfavorable decision by the latter, an appeal to this Court.
5. ID.; ID.; ID.; ID.; EXCEPTIONS; CASE AT BAR NOT FALLING
THEREUNDER. This rule admits of exceptions, as where
public welfare and the advancement of public policy so dictate,
the broader interests of justice so require, or where the Orders
complained of were found to be completely null and void, or that
the appeal was not considered the appropriate remedy (Fernando
v. Vasquez. supra). The case at bar does not fall within any of
these exceptions.

MELENCIO-HERRERA, J.:
These certiorari proceedings stem from the award rendered
against petitioner Telephone Engineering and Services, Co., Inc.
(TESCO) on October 6, 1967 by the Acting Referee of Regional
Office No. 4, Quezon City Sub-Regional Office, Workmen's
Compensation Section, in favor of respondent Leonila S. Gatus
and her children, dependents of the deceased employee Pacifico
L. Gatus. The principal contention is that the award was rendered
without jurisdiction as there was no employer-employee
relationship between petitioner and the deceased.
Petitioner is a domestic corporation engaged in the business of
manufacturing telephone equipment with offices at Sheridan
Street, Mandaluyong, Rizal. Its Executive Vice-President and
General Manager is Jose Luis Santiago. It has a sister company,
the Utilities Management Corporation (UMACOR), with offices in
the same location. UMACOR is also under the management of
Jose Luis Santiago.

On September 8, 1964, UMACOR employed the late Pacifica L.

Gatus as Purchasing Agent. On May 16, 1965, Pacifico L. Gatus
was detailed with petitioner company. He reported back to
UMACOR on August 1, 1965. On January 13, 1967, he
contracted illness and although he retained to work on May 10,
1967, he died nevertheless on July 14, 1967 of "liver cirrhosis
with malignant degeneration."
On August 7, 1967, his widow, respondent Leonila S. Gatus, filed
a "Notice and Claim for Compensation" with Regional Office No.
4, Quezon City Sub-Regional Office, Workmen's Compensation
Section, alleging therein that her deceased husband was an
employee of TESCO, and that he died of liver cirrhosis. 1 On
August 9, 1967, and Office wrote petitioner transmitting the Notice
and for Compensation, and requiring it to submit an Employer's
Report of Accident or Sickness pursuant to Section 37 of the
Workmen's Compensation Act (Act No. 3428). 2 An "Employer's
Report of Accident or Sickness" was thus submitted with
UMACOR indicated as the employer of the deceased. The Report
was signed by Jose Luis Santiago. In answer to questions Nos. 8
and 17, the employer stated that it would not controvert the claim
for compensation, and admitted that the deceased employee
contracted illness "in regular occupation." 3 On the basis of this
Report, the Acting Referee awarded death benefits in the amount
of P5,759.52 plus burial expenses of P200.00 in favor of the heirs
of Gatus in a letter-award dated October 6, 1967 4 against
TESCO.
Replying on October 27, 1967, TESCO, through Jose Luis
Santiago, informed the Acting Referee that it would avail of the
15-days-notice given to it to state its non-conformity to the award
and contended that the cause of the illness contracted by Gatus
was in no way aggravated by the nature of his work. 5
On November 6, 1967, TESCO requested for an extension of ten
days within which to file a Motion for Reconsideration, 6 and on
November 15, 1967, asked for an additional extension of five
days. 7 TESCO filed its "Motion for Reconsideration and/or
Petition to Set Aside Award" on November 18, 1967, alleging as
grounds therefor, that the admission made in the "Employer's
Report of Accident or Sickness" was due to honest mistake and/or
excusable negligence on its part, and that the illness for which
compensation is sought is not an occupational disease, hence,
not compensable under the law. 8 The extension requested was
denied. The Motion for Reconsideration was likewise denied in an
Order issued by the Chief of Section of the Regional Office dated
December 28, 1967 9 predicated on two grounds: that the alleged
mistake or negligence was not excusable, and that the basis of
the award was not the theory of direct causation alone but also on
that of aggravation. On January 28, 1968, an Order of execution
was issued by the same Office.
On February 3, 1968, petitioner filed an "Urgent Motion to Compel
Referee to Elevate the Records to the Workmen's Compensation
Commission for Review." 10 Meanwhile, the Provincial Sheriff of
Rizal levied on and attached the properties of TESCO on
February 17, 1968, and scheduled the sale of the same at public
auction on February 26, 1968. On February 28, 1968, the
Commission issued an Order requiring petitioner to submit
verified or true copies of the Motion for Reconsideration and/or
Petition to Set Aside Award and Order of December 28, 1967, and
to show proof that said Motion for Reconsideration was filed
within the reglementary period, with the warning that failure to
comply would result in the dismissal of the Motion. However,
before this Order could be released, TESCO filed with this Court,
on February 22, 1968, The present petition for "Certiorari with
Preliminary Injunction" seeking to annul the award and to enjoin
the Sheriff from levying and selling its properties at public auction.

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On February 29, 1968, this Court required respondents to answer

the Petition but denied Injunction. 11 TESCO'S Urgent Motion
dated April 2, 1968, for the issuance of a temporary restraining
order to enjoin the Sheriff from proceeding with the auction sale of
its properties was denied in our Resolution dated May 8, 1968.
TESCO asserts: 1wph1.t
I.
That
the
respondent
Workmen's
Compensation
Commission
has
no
jurisdiction nor authority to render the award
(Annex 'D', Petition) against your petitioner
there
being
no
employer-employee
relationship between it and the deceased
Gatus;
II. That petitioner can never be estopped from
questioning the jurisdiction of respondent
commission especially considering that
jurisdiction is never conferred by the acts or
omission of the parties;
III. That this Honorable Court has jurisdiction
to nullify the award of respondent
commission.
TESCO takes the position that the Commission has no jurisdiction
to render a valid award in this suit as there was no employeremployee relationship between them, the deceased having been
an employee of UMACOR and not of TESCO. In support of this
contention, petitioner submitted photostat copies of the payroll of
UMACOR for the periods May 16-31, 1967 and June 1-15, 1967
12
showing the name of the deceased as one of the three
employees listed under the Purchasing Department of UMACOR.
It also presented a photostat copy of a check of UMACOR
payable to the deceased representing his salary for the period
June 14 to July 13, 1967. 13
Both public and private respondents contend, on the other hand,
that TESCO is estopped from claiming lack of employer
employee relationship.
To start with, a few basic principles should be re-stated the
existence of employer-employee relationship is the jurisdictional
foundation for recovery of compensation under the Workmen's
Compensation Law. 14 The lack of employer-employee
relationship, however, is a matter of defense that the employer
should properly raise in the proceedings below. The determination
of this relationship involves a finding of fact, which is conclusive
and binding and not subject to review by this Court. 15

veil of corporate fiction may be pierced as when the same is

made as a shield to confuse the legitimate issues. 16
While, indeed, jurisdiction cannot be conferred by acts or
omission of the parties, TESCO'S denial at this stage that it is the
employer of the deceased is obviously an afterthought, a devise
to defeat the law and evade its obligations. 17 This denial also
constitutes a change of theory on appeal which is not allowed in
this jurisdiction. 18 Moreover, issues not raised before the
Workmen's Compensation Commission cannot be raised for the
first time on appeal. 19 For that matter, a factual question may not
be raised for the first time on appeal to the Supreme Court. 20
This certiorari proceeding must also be held to have been
prematurely brought. Before a petition for certiorari can be
instituted, all remedies available in the trial Court must be
exhausted first. 21 certiorari cannot be resorted to when the
remedy of appeal is present. 22 What is sought to be annulled is
the award made by the Referee. However, TESCO did not pursue
the remedies available to it under Rules 23, 24 and 25 of the
Rules of the Workmen's Compensation Commission, namely, an
appeal from the award of the Referee, within fifteen days from
notice, to the Commission; a petition for reconsideration of the
latter's resolution, if adverse, to the Commission en banc; and
within ten days from receipt of an unfavorable decision by the
latter, an appeal to this Court. As petitioner had not utilized these
remedies available to it, certiorari win not he, it being prematurely
filed. As this Court ruled in the case of Manila Jockey Club, Inc.
vs. Del Rosario, 2 SCRA 462 (1961). 1wph1.t
An aggrieved party by the decision of a
Commissioner should seek a reconsideration
of the decision by the Commission en banc. If
the decision is adverse to him, he may
appeal to the Supreme Court. An appeal
brought to the Supreme Court without first
resorting to the remedy referred to is
premature and may be dismissed.
Although this rule admits of exceptions, as where public welfare
and the advancement of public policy so dictate, the broader
interests of justice so require, or where the Orders complained of
were found to be completely null and void or that the appeal was
not considered the appropriate remedy, 23 the case at bar does
not fan within any of these exceptions. WHEREFORE, this
Petition is hereby dismissed.
SO ORDERED.

Viewed in the light of these criteria, we note that it is only in this

Petition before us that petitioner denied, for the first time, the
employer-employee relationship. In fact, in its letter dated October
27, 1967 to the Acting Referee, in its request for extension of time
to file Motion for Reconsideration, in its "Motion for
Reconsideration and/or Petition to Set Aside Award," and in its
"Urgent Motion to Compel the Referee to Elevate Records to the
Commission for Review," petitioner represented and defended
itself as the employer of the deceased. Nowhere in said
documents did it allege that it was not the employer. Petitioner
even admitted that TESCO and UMACOR are sister companies
operating under one single management and housed in the same
building. Although respect for the corporate personality as such, is
the general rule, there are exceptions. In appropriate cases, the

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Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 89804 October 23, 1992
CALVIN S. ARCILLA, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and EMILIO
RODULFO, respondents.
SYLLABUS

1. COMMERCIAL LAW; PRIVATE CORPORATIONS; DOCTRINE

OF PIERCING THE VEIL OF CORPORATE FICTION;
APPLICABLE TO CASE AT BAR. Moreover, by no stretch of
even the most fertile imagination may one be able to conclude
that the challenged Amended Decision directed Csar Marine
Resources, Inc. to pay the amounts adjudged. By its clear and
unequivocal language, it is the petitioner who was declared liable
therefor and consequently made to pay. That the latter was
ordered to do so as president of the corporation would not free
him from the responsibility of paying the due amount simply
because according to him, he had ceased to be corporate
president; such conclusion stems from the fact that the public
respondent, in resolving his motion for clarificatory judgment,
pierced the veil of corporate fiction and cast aside the contention
that both he and the corporation have separate and distinct
personalities. In short, even if We are to assume arguendo that
the obligation was incurred in the name of the corporation, the
petitioner would still be personally liable therefor because for all
legal intents and purposes, he and the corporation are one and
the same. Csar Marine Resources, Inc. is nothing more than his
business conduit and alter ego. The fiction of a separate juridical
personality conferred upon such corporation by law should be
disregarded. Significantly, petitioner does not seriously challenge
the public respondents application of the doctrine which permits
the piercing of the corporate veil and the disregarding of the
fiction of a separate juridical personality; this is because he knows
only too well that from the very beginning, he merely used the
corporation for his personal purposes.
2. REMEDIAL LAW; CIVIL PROCEDURE; DEFENSES AND
OBJECTIONS NOT PLEADED IN MOTION TO DISMISS OR IN
ANSWER DEEMED WAIVED; EXCEPTIONS; CASE AT BAR.
Moreover, petitioner neglected to set up in his Answer the defense
that he is not personally liable to the private respondent because
the "vales" were corporate obligations of Csar Marine Resources,
Inc. Of course, that defense would have been inconsistent with
his volunteered admission that the KKK loan which resulted in
the procurement of the pro-forma invoice from the private
respondent was for his benefit. In any case, the failure to set it
up as an affirmative defense amounted to a waiver thereof
Section 27 Rule 9 of the Rules of Court expressly provides that
defenses and objections, other than the failure to state a cause of
action and lack of jurisdiction, not pleaded either in a motion to
dismiss or in the answer are deemed waived. Petitioner, as a
lawyer, knows or is supposed to know this rule. Since he prepared
the Answer himself, We cannot think of any possible reason why
he failed to set up this defense other than his realization of its
inherent weakness or his outright inexcusable negligence or
forgetfulness. And even if it were due to inadvertence, he could
still have subsequently availed of Section 27 Rule 10 of the Rules
of Court which allows a party to amend his answer as a matter of
right within the period therein stated. Failing that, he could have

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resorted to Section 3 thereof which allows the making of

amendments upon leave of court. On the other hand, if the lapse
was due to forgetfulness, it is just unfortunate that he did not
exercise due diligence in the conduct of his own affairs. He can
expect
no
reward
for
it.
3. ID.; ID.; APPEAL; AVAILABLE ONLY TO ORIGINAL PARTIES
TO MAIN CASE; CASE AT BAR. The grant of affirmative relief
based on the first assigned error would really redound to the
benefit of an entity which was not made a party in the main case
and which did not seek to intervene therein. Therefore, it has no
personality to seek a review of the public respondents Amended
Decision under Rule 45 of the Rules of Court. Only the original
parties to the main case may do so.
DAVIDE, JR., J.:
This petition is a belated attempt to avoid the adverse amended
decision of public respondent, promulgated on 31 May 1989 in
C.A.-G.R. No. 11389, 1 on the ground that petitioner is not
personally liable for the amount adjudged since the same
constitutes a corporate liability which nevertheless cannot even
bind or be enforced against the corporation because it is not a
party in the collection suit filed before the trial court.
The procedural antecedents are not complicated.
On 4 June 1985, private respondent filed with the Regional Trial
Court (RTC) of Catanduanes a complaint for a sum of money
against petitioner. 2 The case was docketed as Civil Case No.
1992 and was assigned to Branch 42 thereof. It is alleged therein:
xxx xxx xxx
3. That from late 1981 up to early 1983, the
defendant, taking advantage of his close
friendship with the plaintiff, succeeded in
securing on credit from the plaintiff, various
items, cash and checks which the defendant
encashed, in the total amount of P93,358.51,
which the plaintiff willingly extended because
of the representations of the defendant that
he was a successful financial consultant of
local and international businessmen;
4. That defendant's indebtedness referred to
in the next preceding paragraph, is shown
and described in thirty (30) "vales" signed by
him or by persons authorized by him, all of
which documents are in the possession of the
plaintiff for being unredeemed or unpaid,
xerox copies attached as Annexes "A" to "Z"
and "AA" to "DD" which are hereby made
integral parts hereof;
5. That commencing with the summer months
of 1983 up to the time immediately before the
filing of this complaint, the plaintiff had made
numerous demands for payment but the
respondent acted in gross and evident bad
faith in refusing to satisfy the plaintiff's plainly
valid, just and demandable claim;

undersigned counsel who charged the

plaintiff with P1,000.00 for accepting the
case, P200.00 appearance fee for every
appearance before this Court, and attorney's
contingent fee of 25% of the award in favor of
the plaintiff; plaintiff shall incur litigation
expenses which may amount to no less than
P5,000.00, all of which amounts are
recoverable from the defendant.
In his Answer, 3 petitioner does not deny having had business
transactions with the private respondent but alleges that the
professional relationship began only in August of 1982 when he
"was looking for a "pro-forma" invoice to support his loan with the
Kilusang Kabuhayan at Kaunlaran (KKK for short) under the
Ministry of Human Settlement (sic)." 4 He explicitly admits that
"(H)is loan was in the same of his family corporation, CSAR
Marine
Resources,
Inc.;" 5 however, the "vales", more specifically Annexes "A" to
"DD" of the complaint, "were liquidated in the bank loan releases."
6
It is thus clear that his main defense is payment; he did not
interpose any other affirmative defense.
In his Pre-Trial Brief, 7 petitioner reiterated the earlier claim that
his first business dealing with the plaintiff (private respondent
herein) was in August of 1982. This time, however, he alleges that
"as President of CSAR Marine Resources, Inc., he requested for
a pro-forma Invoice for said corporation to support the loan
application with the Kilusang Kabuhayan at Kaunlaran (KKK for
short), with the Ministry of Human Settlement (sic)." 8
In its Decision of 1 August 1986,
following findings of fact:

the trial court made the

Defendant admitted the genuineness (sic)

and due execution of Exhibits "A" to "DD" but,
according to him, he already paid plaintiff
P56,098.00 thru PNB Virac Branch, per Cash
Voucher dated September 28, 1982 (Exh. 3)
and then P42,363.75 also thru PNB Virac
Branch, per PNB check No. 628861K dated
December 16, 1982 (Exh. 1).
Analyzing the evidence adduced by both parties, it ruled that
since Exhibit "3" is dated 28 September 1982 and the "vales",
Exhibits "A" to "DD", with the exception of Exhibits "K" in the
amount of P1,730.00 and "Q" in the amount of P10,765.00, were
issued after said date, it could not have been in payment of the
"vales" other than that evidenced by Exhibits "K" and "Q"
Considering, however, that the "vales" remained in the
possession of the private respondent, they are presumed to
remain unpaid; in fact, private respondent so testified that they
were not paid at all. The court therefore ordered petitioner to pay
private respondent:
(a) the total amount of P92,358.43 covered
by the "vales", plus interest thereon at the
rate of twelve (12%) per cent per annum from
June 4, 1985 when the complaint was filed;
(b) P9,000.00 for and as attorney's fees; and
(c) the cost of suit. 10

6. That the plaintiff is left without any

recourse other than to enforce his claim in
court and had to secure the services of the

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Petitioner appealed this decision to the public respondent which

docketed the case as C.A.-G.R. CV No. 11389.
The public respondent affirmed the trial court's decision in its
Decision of 14 January 1988. 11 As could be gleaned therefrom,
petitioner's assigned errors are as follows:
. . . defendant raised as error of the court a
quo in (sic) holding that the "vales" (Exhs. A
to DD) have not been paid; that the
presumption in favor of the plaintiff-appellee
that since he was in possession of the "vales"
the same have not been paid, remained
undisputed; that the total transaction between
the parties amount to more than
P200,000.00; and in rendering a decision in
favor of the plaintiff-appellee plus the award
of attorney's fees in his favor. 12
On 5 February 1988, petitioner filed a motion to reconsider the
aforesaid decision 13 alleging therein, inter alia, that (a) the
evidence showing payment of the "vales" is "uncontroverted",
hence the presumption that they were not paid simply because
they remain in the possession of the creditor cannot arise; (b) the
alleged non-payment of the "vales" could have been further
explained if the trial court gave the appellant the opportunity to
present sur-rebuttal witness and documentary evidence; besides,
he has newly discovered evidence invoked in a prayer for a
new trial that was nevertheless denied by the lower court which
consists of a letter, dated 7 February 1983, signed by Rafael
Rodulfo, General Manager of the private respondent and
addressed to Brig. Gen. Clemente Racela, then KKK General
Action Officer, categorically stating that "the account of CSAR
Marine Resources, Inc. c/o Atty. Calvin Arcilla" is only P23,639.33;
and (c) the evidence presented by both parties disclosure that
"the subject account are (sic) all in the name of CSAR MARINE
RESOURCES, INC., a corporation separate and distinct from the
appellant;" such fact remains "uncontroverted" as shown by
Exhibits "1", "3", "A" to "DD" adopted as Exhibits "7" to "25" for the
appellant." 14 He then prays that:

Rodulfo, dated 7 February 1983, to General Clemente A. Racela

(Exh. "1"-Motion) wherein the former, as General Manager of
private respondent's Universal Enterprises, informed the latter
that:
. . . Csar Marine Resources, Inc. c/o Atty.
Calvin Arcilla has an outstanding obligation of
TWENTY THREE THOUSAND SIX PESOS
to Universal Enterprises as a result of various
purchases of construction materials. 17
Thereafter, on 31 May 1989, the public respondent promulgated
an Amended Decision, 18 the dispositive portion of which reads as
follows:
WHEREFORE, the decision of this Court
promulgated on January 14, 1988 is hereby
reconsidered and a new one rendered,
ordering defendant-appellant to pay plaintiffappellee in his capacity as President of Csar
Marine Resources, Inc. the outstanding
balance of P23,639.33 to Universal
Enterprises, owned and operated by plaintiffappellee, plus interest at 12% per annum
from June 4, 1985 when the complaint was
filed; attorney's fees of P1,000.00, P200.00
per court appearance of counsel and 25% of
the amount awarded; plus the costs of the
suit. 19
On 4 January 1989, petitioner filed a Motion For Clarificatory
Judgment 20 alleging therein that:
3. It is very clear from the findings of this
Honorable Court contained in the amended
decision promulgated on May 31, 1989 that:
3.1. Defendant Calvin S.
Arcilla never had any
personal
business
transaction (sic) in the
plaintiff;

. . . considering that appellees was not able

to prove by preponderance of evidence the
alleged unpaid account of appellant, the
decision promulgated on January 14, 1988
be RECONSIDERED and a new one be
entered REVERSING the lower court
decision
and
thereby
ordering
the
DISMISSAL of plaintiff-appellee's complaint,
with damages and costs against appellee.

3.2.
Csar
Marine
Resources, Inc. has an
outstanding balance in
the
amount
of
P23,636.33 with plaintiffappellee out of the KKK
loan transaction;

In the remote possibility, that the appellee's

complaint cannot be dismissed outrightly, it is
further prayed that his Honorable Tribunal
orders (sic) a new trial for appellant to
present additional evidence he wanted to
present in his motion for new trial. 15

3.3.
Csar
Marine
Resources, Inc. is not a
party in this case;
xxx xxx xxx

xxx xxx xxx

Reacting to this motion, private respondent, in a "Manifestation
dated 7 February 1988, informed the public respondent that in the
interest of justice and fair play, he interposes no objection to the
alternative prayer for a new trial. 16 Hearing was thereafter
conducted to receive the petitioner's so-called newly discovered
evidence consisting of the abovementioned letter of Rafael

5. It is rather confusing (sic) that defendantappellant is ordered to pay plaintiff-appellee

in his capacity as President of Csar Marine
Resources, Inc. the said amount of
P23,639.33, when plaintiff-appellee for
ulterior motives choose (sic) not to implead
said corporation. It need not be emphasized
that the personality and liability of the

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defendant-appellant and that of Csar Marine

Resources, Inc., as a corporation, are
separate and distinct from its (sic) other. . . . .
21

He then prays that:

. . . an order be issued clarifying the liability of
defendant-appellant in his personal capacity
as regards the amount of P23,639.33, if any,
otherwise, the case be dismissed against
him. 22
Public respondent denied this motion in its Resolution of 17
August
1989 23 on these grounds: (a) the veil of corporate fiction should
be pierced in this case; (b) since petitioner did not raise the issue
of separate corporate identity in the pleadings in the trial court or
in his Brief, he cannot raise it for the first time in a Motion for
Clarificatory Judgment; in his answer to paragraphs 3 and 4 of the
complaint, he admits that it was he and not his corporation who
transacted business with the private respondent; and (c) the
"vales" refer not only to construction materials for which the loan
to Csar Marine Resources, Inc. was supposed to be used, but
also to consumables such as salt, rice, food seasoning,
cigarettes, coffee, etc.; this indicates that the petitioner himself did
not seriously treat the corporate affairs of Csar Marine Resources,
Inc. as separate and distinct from his own.
Not satisfied with the Resolution, petitioner filed this petition. He
alleges therein that respondent Court of Appeals:
I
. . . ERRED IN HOLDING CSAR MARINE
RESOURCES,
INC.,
A
DOMESTIC
CORPORATION
DULY
ORGANIZED
ACCORDING
TO
LAW,
WHERE
PETITIONER THE PRESIDENT (sic),
LIABLE TO THE PRIVATE RESPONDENT IN
THE AMOUNT AWARDED
IN
THE
APPEALED DECISION WITHOUT BEING
IMPLEADED AS A PARTY IN THE CASE IN
VIOLATION
OF
LAW
AND
THE
APPLICABLE
DECISIONS
OF
THE
SUPREME COURT; and
II
. . . IN NOT DISMISSING THE CASE
AGAINST THE PETITIONER. 24
After the filing of the Comment, the Reply thereto and the
Rejoinder to the latter, this Court gave due course to the petition
and required the parties to submit their respective Memoranda. 25
The records bear nothing to prop up the instant petition. The
arguments adduced by the petitioner breathe no life to it.
On the contrary, the pleadings lead Us to the inescapable
conclusion that the petitioner, who is himself a lawyer, is merely
taking advantage of the use of the innocuous phrase "in his
capacity as President" found in the dispositive portion of the
challenged Amended Decision making the same a sanctuary

for a defense which he, as hereinafter discussed, had long since

abandoned or waived either deliberately or through his
obliviscence. His sole purpose, of course, is to avoid complying
with the liability adjudged against him by the public respondent;
such avoidance is premiered on the so-called newly discovered
evidence offered after the public respondent had bent over
backwards to grant him a new trial despite the availability of such
evidence during pendency of the proceedings before the trial
court. It is to be noted that he failed to assign as error in his Brief
the denial by the said court of his motion for new trial on the basis
thereof.
The grant of affirmative relief based on the first assigned error
would really redound to the benefit of an entirety which was not
made a party in the main case and which did not seek to
intervene therein. Therefore, it has no personality to seek as
review of the public respondent's Amended Decision under Rule
45 of the Rules of Court. Only the original parties to the main case
may do so. 26 Moreover, by no stretch of even the most fertile
imagination may one be able to conclude that the challenged
Amended Decision directed Csar Marine Resources, Inc. to pay
the amounts adjudge. By its clear and unequivocal language, it is
the petitioner who was declared liable therefor and consequently
made to pay. That the latter was ordered to do so as president of
the corporation would not free him from the responsibility of
paying the due amount simply because according to him, he had
ceased to be corporate president; such conclusion stems from the
fact that the public respondent, in resolving his motion for
clarificatory judgment, pierced the veil of corporate fictional and
cast aside the contention that both he and the corporation have
separate and distinct personalities. In short, even if We are to
assume arguendo that the obligation was incurred in the name of
the corporation, the petitioner would still be personally liable
therefor because for all legal intents and purposes, he and the
corporation are one and the same. Csar Marine Resources, Inc. is
nothing more than his business conduit and alter ego. The fiction
of a separate juridical personality conferred upon such
corporation by law should be disregarded. 27 Significantly,
petitioner does not seriously challenge the public respondent's
application of the doctrine which permits the piercing of the
corporate veil and the disregarding of the fiction of a separate
juridical personality; this is because he knows only too well that
from the very beginning, he merely used the corporation for his
personal purposes.
In his answer to the complaint, petitioner volunteered the
information that the pro-forma invoice which he obtained from the
private respondent and which became the source of the
obligations reflected in the "vales" was to support his loan. He
states in part:
. . . when defendant was looking for a "proforma" invoice to support his loan with the
Kilusang Kabuhayan at Kaunlaran . . . His
loan was in the name of his family
corporation, CSAR Marine Resources, Inc. . .
. . 28
That it was indeed his loan is further borne out by his
allegations therein part:
(a) The accounting between plaintiff and
defendant, however, was not closed because
adjustments were needed in the following
points: 29

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(b) 5. While it is true that plaintiff made

demands for payment of an alleged balance
of P23,000.00 in March 1983, which demand
was even coursed thru the KKK Regional and
Provincial Offices, after the demand of
P23,000.00
defendant paid
additional
P5,000.00 cash to plaintiff. 30

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-48930

In his motion to reconsider the public respondent's

original decision, petitioner becomes more candid in his
admissions that indeed, the transaction with the private
respondent and the loan obtained previously were for
his personal account. Thus he asserts that:
(a) the first document made between
appellee and appellant was the pro-forma
invoice. 31
(b) [c]considering that appellant had already
an approved loan and was ready for release .
. . . 32
Moreover, petitioner neglected to set up in his Answer the defense
that he is not personally liable to private respondent because the
"vales" were corporate obligations of Csar Marine Resources,
Inc.. Of course, that defense would have been inconsistent with
his volunteered admission that the KKK loan which resulted in
the procurement of the pro-forma invoice from the private
respondent was for his benefit. In any case, the failure to set it
up as an affirmative defense amounted to a waiver thereof.
Section 2, Rule 9 of the Rules of Court expressly proved that
defenses and objections, other than the failure to state a cause of
action and lack of jurisdiction, not pleaded either in a motion to
dismiss or in the answer are deemed waved. Petitioner, as a
lawyer, knows or is supposed to know this rule. Since he prepared
the Answer himself, We cannot think of any possible reason why
he failed to set up this defense other than his realization of its
inherent weakness or his outright inexcusable negligence of
forgetfulness. And even if it were due to inadvertence, he could
still have subsequently availed of Section 2, Rule 10 of the Rules
of Court which allows a party to amend his answer as a matter of
right within the period therein stated. Failing that, he could have
resorted to Section 3 thereof which allows the making of
amendments upon leave of court. On the other hand, if the lapse
was due to forgetfulness, it is just unfortunate that he did not
exercise due diligence in the conduct of his won affairs. He can
expect no reward for it.
Then too, as correctly noted by the public respondent, petitioner,
in his Brief, did not assign as error the holding of the trial court
that he is solely liable for the obligation.
Petitioner's volunteered admission that he procured the pro-forma
invoice from the private respondent in connection with his loan
from the KKK, using his family corporation in the process, and his
deliberate waiver of the aforementioned defense provide an
insurmountable obstacle to the viability of this petition.
WHEREFORE, for utter lack of merit, the instant petition is
DENIED with costs against petitioner.
This decision is immediately executory.
SO ORDERED.

February 23, 1944

ANTONIO VAZQUEZ, petitioner,

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

February 23, 1944

FRANCISCO DE BORJA, petitioner,

vs.
ANTONIO VAZQUEZ, respondent.
SYLLABUS
1. CORPORATIONS; OFFICERS PERSONAL LIABILITY ON
CONTRACTS. It is well known that a corporation is an artificial
being invested by law with a personality of its own, separate and
distinct from that of its stockholders and from that of its officers
who manage and run its affairs. The mere fact that its personality
is owing to a legal fiction and that it necessarily has to act thru its
agents, does not make the latter personally liable on a contract
duly entered into, or for an act lawfully performed, by them for and
in its behalf. The legal fiction by which the personality of a
corporation is created is a practical reality and necessity. Without
it no corporate entities may exist and no corporate business may
be transacted. Such legal fiction may be disregarded only when
an attempt is made to use it as a cloak to hide an unlawful or
fraudulent purpose. No such thing has been alleged or proven in
this case. It has not been alleged nor even intimated that Vazquez
personally benefited by the contract of sale in question and that
he is merely invoking the legal fiction to avoid personal liability.
Neither is it contended that he entered into said contract for the
corporation in bad faith and with intent to defraud the plaintiff. We
find no legal and factual basis upon which to hold him liable on
the contract either principally or subsidiarily.
2. ID.; ID.; NEGLIGENCE. The trial court found him guilty of
negligence in the performance of the contract and held him
personally liable on that account. On the other hand, the Court of
Appeals found that he "no solamente obro con negligencia, sino
interviniendo culpa de su parte, por lo que de acuerdo con los
arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable
subsidiariamente del pago de la cantidad objeto de la demanda."
We think both the trial court and the Court of Appeals erred in law
in so holding. They have manifestly failed to distinguish a
contractual from an extracontractual obligation, or an obligation
arising from contract from an obligation arising from culpa
aquiliana. The fault and negligence referred to in articles 11011104 of the Civil Code are those incidental to the fulfillment or
nonfulfillment of a contractual obligation; while the fault or
negligence referred to in article 1902 is the culpa aquiliana of the
civil law, homologous but not identical to tort of the common law,
which gives rise to an obligation independently of any contract.
(Cf. Manila R. R. Co. v. Cia. Trasatlantica, 38 Phil., 875, 887-890;
Cangco v. Manila R. R. Co., 38 Phil., 768.) The fact that the
corporation, acting thru Vazquez as its manager, was guilty of
negligence in the fulfillment of the contract, did not make Vazquez
principally or even subsidiarily liable for such negligence. Since it

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was the corporations contract, its nonfulfillment, whether due to

negligence or fault or to any other cause, made the corporation
and not its agent liable.
3. ID.; ID.; ID. On the other hand, independently of the contract
Vazquez by his fault or negligence caused damage to the plaintiff,
he would be liable to the latter under article 1902 of the Civil
Code. But then the plaintiffs cause of action should be based on
culpa aquiliana and not on the contract alleged in his complaint
herein; and Vazquez liability would be principal and not merely
subsidiary, as the Court of Appeals has erroneously held.
4. ID.; ID.; ID.; NO CAUSE OF ACTION BASED ON "CULPA
AQUILIANA" ALLEGED IN COMPLAINT OR LITIGATED IN
TRIAL COURT; NO JURISDICTION OVER THE ISSUE. No
such cause of action was alleged in the complaint or tried by
express or implied consent of the parties by virtue of section 4 of
Rule 17. Hence the trial court had no jurisdiction over the issue
and could not adjudicate upon it. (Reyes v. Diaz, G. R. No.
48754.) Consequently it was error for the Court of Appeals to
remand the case to the trial court to try and decide such issue.
OZAETA, J.:
This action was commenced in the Court of First Instance of
Manila by Francisco de Borja against Antonio Vazquez and
Fernando Busuego to recover from them jointly and severally the
total sum of P4,702.70 upon three alleged causes of action, to wit:
First, that in or about the month of January, 1932, the defendants
jointly and severally obligated themselves to sell to the plaintiff
4,000 cavans of palay at P2.10 per cavan, to be delivered during
the month of February, 1932, the said defendants having
subsequently received from the plaintiff in virtue of said
agreement the sum of P8,400; that the defendants delivered to
the plaintiff during the months of February, March, and April,
1932, only 2,488 cavans of palay of the value of P5,224.80 and
refused to deliver the balance of 1,512 cavans of the value of
P3,175.20 notwithstanding repeated demands. Second, that
because of defendants' refusal to deliver to the plaintiff the said
1,512 cavans of palay within the period above mentioned, the
plaintiff suffered damages in the sum of P1,000. And, third, that
on account of the agreement above mentioned the plaintiff
delivered to the defendants 4,000 empty sacks, of which they
returned to the plaintiff only 2,490 and refused to deliver to the
plaintiff the balance of 1,510 sacks or to pay their value
amounting to P377.50; and that on account of such refusal the
plaintiff suffered damages in the sum of P150.
The defendant Antonio Vazquez answered the complaint, denying
having entered into the contract mentioned in the first cause of
action in his own individual and personal capacity, either solely or
together with his codefendant Fernando Busuego, and alleging
that the agreement for the purchase of 4,000 cavans of palay and
the payment of the price of P8,400 were made by the plaintiff with
and to the Natividad-Vasquez Sabani Development Co., Inc., a
corporation organized and existing under the laws of the
Philippines, of which the defendant Antonio Vazquez was the
acting manager at the time the transaction took place. By way of
counterclaim, the said defendant alleged that he suffered
damages in the sum of P1,000 on account of the filing of this
action against him by the plaintiff with full knowledge that the said
defendant had nothing to do whatever with any and all of the
transactions mentioned in the complaint in his own individual and
personal capacity.
The trial court rendered judgment ordering the defendant Antonio
Vazquez to pay to the plaintiff the sum of P3,175.20 plus the sum
of P377.50, with legal interest on both sums, and absolving the

defendant Fernando Busuego (treasurer of the corporation) from

the complaint and the plaintiff from the defendant Antonio
Vazquez' counterclaim. Upon appeal to the Court of Appeals, the
latter modified that judgment by reducing it to the total sum of
P3,314.78, with legal interest thereon and the costs. But by a
subsequent resolution upon the defendant's motion for
reconsideration, the Court of Appeals set aside its judgment and
ordered that the case be remanded to the court of origin for
further proceedings. The defendant Vazquez, not being agreeable
to that result, filed the present petition for certiorari (G.R. No.
48930) to review and reverse the judgment of the Court of
Appeals; and the plaintiff Francisco de Borja, excepting to the
resolution of the Court of Appeals whereby its original judgment
was set aside and the case was ordered remanded to the court of
origin for further proceedings, filed a cross-petition for certiorari
(G.R. No. 48931) to maintain the original judgment of the Court of
Appeals.
The original decision of the Court of Appeals and its subsequent
resolutions on reconsideration read as follows:
Es hecho no controvertido que el 25 de Febrero de
1932, el demandado-apelante vendio al demandante
4,000 cavanes de palay al precio de P2.10 el cavan, de
los cuales, dicho demandante solamente recibio 2,583
cavanes; y que asimismo recibio para su envase 4,000
sacos vacios. Esta provbado que de dichos 4,000
sacos vacios solamente se entregaron, 2,583
quedando en poder del demandado el resto, y cuyo
valor es el de P0.24 cada uno. Presentada la demanda
contra los demandados Antonio Vazquez y Fernando
Busuego para el pago de la cantidad de P4,702.70, con
sus intereses legales desde el 1.o de marzo de 1932
hasta su completo pago y las costas, el Juzgado de
Primera Instancia de Manila el asunto condenando a
Antonio Vazquez a pagar al demandante la cantidad de
P3,175.20, mas la cantidad de P377.50, con sus
intereses legales, absolviendo al demandado Fernando
Busuego de la demanda y al demandante de la
reconvencion de los demandados, sin especial
pronunciamiento en cuanto a las costas. De dicha
decision apelo el demandado Antonio Vazquez,
apuntado como principal error el de que el habia sido
condenado personalmente, y no la corporacion por el
representada.
Segun la preponderancia de las pruebas, la venta
hecha por Antonio Vazquez a favor de Francisco de
Borja de los 4,000 cavanes de palay fue en su
capacidad de Presidente interino y Manager de la
corporacion Natividad-Vazquez Sabani Development
Co., Inc. Asi resulta del Exh. 1, que es la copia al
carbon del recibo otorgado por el demandado Vazquez,
y cuyo original lo habia perdido el demandante, segun
el. Asi tambien consta en los libros de la corporacion
arriba mencionada, puesto que en los mismos se ha
asentado tanto la entrada de los P8,400, precio del
palay, como su envio al gobierno en pago de los
alquileres de la Hacienda Sabani. Asi mismo lo admitio
Francisco de Borja al abogado Sr. Jacinto Tomacruz,
posterior presidente de la corporacion sucesora en el
arrendamiento de la Sabani Estate, cuando el solicito
sus buenos oficios para el cobro del precio del palay no
entregado. Asi igualmente lo declaro el que hizo
entrega de parte del palay a Borja, Felipe Veneracion,
cuyo testimonio no ha sido refutado. Y asi se deduce
de la misma demanda, cuando se incluyo en ella a

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Fernando Busuego, tesorero de la Natividad-Vazquez

Sabani Development Co., Inc.
Siendo esto asi, la principal responsable debe ser la
Natividad-Vazquez Sabani Development Co., Inc., que
quedo insolvente y dejo de existir. El Juez sentenciador
declaro, sin embargo, al demandado Vazquez
responsable del pago de la cantidad reclamada por su
negligencia al vender los referidos 4,000 cavanes de
palay sin averiguar antes si o no dicha cantidad existia
en las bodegas de la corporacion.
Resulta del Exh. 8 que despues de la venta de los
4,000 cavanes de palay a Francisco de Borja, el mismo
demandado vendio a Kwong Ah Phoy 1,500 cavanes al
precio de P2.00 el cavan, y decimos 'despues' porque
esta ultima venta aparece asentada despues de la
primera. Segun esto, el apelante no solamente obro
con negligencia, sino interviniendo culpa de su parte,
por lo que de acuerdo con los arts. 1102, 1103 y 1902
del Codigo Civil, el debe ser responsable
subsidiariamente del pago de la cantidad objecto de la
demanda.
En meritos de todo lo expuesto, se confirma la decision
apelada con la modificacion de que el apelante debe
pagar al apelado la suma de P2,295.70 como valor de
los 1,417 cavanes de palay que dejo de entregar al
demandante, mas la suma de P339.08 como importe
de los 1,417 sacos vacios, que dejo de devolver, a
razon de P0.24 el saco, total P3,314.78, con sus
intereses legales desde la interposicion de la demanda
y las costas de ambas instancias.
Vista la mocion de reconsideracion de nuestra decision
de fecha 13 de Octubre de 1942, y alegandose en la
misma que cuando el apelante vendio los 1,500
cavanes de palay a Ah Phoy, la corporacion todavia
tenia bastante existencia de dicho grano, y no estando
dicho extremo suficientemente discutido y probado, y
pudiendo variar el resultado del asunto, dejamos sin
efecto nuestra citada decision, y ordenamos la
devolucion de la causa al Juzgado de origen para que
reciba pruebas al efecto y dicte despues la decision
correspondiente.
Upon consideration of the motion of the attorney for the
plaintiff-appellee in case CA-G.R. No. 8676, Francisco
de Borja vs. Antonio Vasquez et al., praying, for the
reasons therein given, that the resolution of December
22, 1942, be reconsidered: Considering that said
resolution remanding the case to the lower court is for
the benefit of the plaintiff-appellee to afford him
opportunity to refute the contention of the defendantappellant Antonio Vazquez, motion denied.
The action is on a contract, and the only issue pleaded and tried
is whether the plaintiff entered into the contract with the defendant
Antonio Vazquez in his personal capacity or as manager of the
Natividad-Vazquez Sabani Development Co., Inc. The Court of
Appeals found that according to the preponderance of the
evidence "the sale made by Antonio Vazquez in favor of Francisco
de Borja of 4,000 cavans of palay was in his capacity as acting
president and manager of the corporation Natividad-Vazquez
Sabani Development Co., Inc." That finding of fact is final and, it
resolving the only issue involved, should be determinative of the
result.

The Court of Appeals doubly erred in ordering that the cause be

remanded to the court of origin for further trial to determine
whether the corporation had sufficient stock of palay at the time
appellant sold, 1500 cavans of palay to Kwong Ah Phoy. First, if
that point was material to the issue, it should have been proven
during the trial; and the statement of the court that it had not been
sufficiently discussed and proven was no justification for ordering
a new trial, which, by the way, neither party had solicited but
against which, on the contrary, both parties now vehemently
protest. Second, the point is, in any event, beside the issue, and
this we shall now discuss in connection with the original judgment
of the Court of Appeals which the plaintiff cross-petitioner seeks to
maintain.
The action being on a contract, and it appearing from the
preponderance of the evidence that the party liable on the
contract is the Natividad-Vazquez Sabani Development Co., Inc.
which is not a party herein, the complaint should have been
dismissed. Counsel for the plaintiff, in his brief as respondent,
argues that altho by the preponderance of the evidence the trial
court and the Court of Appeals found that Vazquez celebrated the
contract in his capacity as acting president of the corporation and
altho it was the latter, thru Vazquez, with which the plaintiff had
contracted and which, thru Vazquez, had received the sum of
P8,400 from Borja, and altho that was true from the point of view
of a legal fiction, "ello no impede que tambien sea verdad lo
alegado en la demanda de que la misma persona de Vasquez fue
la que contrato con Borja y que la misma persona de Vasquez fue
quien recibio la suma de P8,400." But such argument is invalid
and insufficient to show that the president of the corporation is
personally liable on the contract duly and lawfully entered into by
him in its behalf.
It is well known that a corporation is an artificial being invested by
law with a personality of its own, separate and distinct from that of
its stockholders and from that of its officers who manage and run
its affairs. The mere fact that its personality is owing to a legal
fiction and that it necessarily has to act thru its agents, does not
make the latter personally liable on a contract duly entered into, or
for an act lawfully performed, by them for an in its behalf. The
legal fiction by which the personality of a corporation is created is
a practical reality and necessity. Without it no corporate entities
may exists and no corporate business may be transacted. Such
legal fiction may be disregarded only when an attempt is made to
use it as a cloak to hide an unlawful or fraudulent purpose. No
such thing has been alleged or proven in this case. It has not
been alleged nor even intimated that Vazquez personally
benefited by the contract of sale in question and that he is merely
invoking the legal fiction to avoid personal liability. Neither is it
contended that he entered into said contract for the corporation in
bad faith and with intent to defraud the plaintiff. We find no legal
and factual basis upon which to hold him liable on the contract
either principally or subsidiarily.
The trial court found him guilty of negligence in the performance
of the contract and held him personally liable on that account. On
the other hand, the Court of Appeals found that he "no solamente
obro con negligencia, sino interveniendo culpa de su parte, por lo
que de acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil,
el debe ser responsable subsidiariamente del pago de la cantidad
objeto de la demanda." We think both the trial court and the Court
of Appeals erred in law in so holding. They have manifestly failed
to distinguish a contractual from an extracontractual obligation, or
an obligation arising from contract from an obligation arising from
culpa aquiliana. The fault and negligence referred to in articles
1101-1104 of the Civil Code are those incidental to the fulfillment
or nonfullfillment of a contractual obligation; while the fault or
negligence referred to in article 1902 is the culpa aquiliana of the

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CORPORATION LAW | 163

civil law, homologous but not identical to tort of the common law,
which gives rise to an obligation independently of any contract.
(Cf. Manila R.R. Co. vs. Cia. Trasatlantica, 38 Phil., 875, 887-890;
Cangco vs. Manila R.R. Co., 38 Phil. 768.) The fact that the
corporation, acting thru Vazquez as its manager, was guilty of
negligence in the fulfillment of the contract, did not make Vazquez
principally or even subsidiarily liable for such negligence. Since it
was the corporation's contract, its nonfulfillment, whether due to
negligence or fault or to any other cause, made the corporation
and not its agent liable.
On the other hand if independently of the contract Vazquez by his
fault or negligence cause damaged to the plaintiff, he would be
liable to the latter under article 1902 of the Civil Code. But then
the plaintiff's cause of action should be based on culpa aquiliana
and not on the contract alleged in his complaint herein; and
Vazquez' liability would be principal and not merely subsidiary, as
the Court of Appeals has erroneously held. No such cause of
action was alleged in the complaint or tried by express or implied
consent of the parties by virtue of section 4 of Rule 17. Hence the
trial court had no jurisdiction over the issue and could not
adjudicate upon it (Reyes vs. Diaz, G.R. No. 48754.)
Consequently it was error for the Court of Appeals to remand the
case to the trial court to try and decide such issue.
It only remains for us to consider petitioner's second assignment
of error referring to the lower courts' refusal to entertain his
counterclaim for damages against the respondent Borja arising
from the bringing of this action. The lower courts having sustained
plaintiff's action. The finding of the Court of Appeals that
according to the preponderance of the evidence the defendant
Vazquez celebrated the contract not in his personal capacity but
as acting president and manager of the corporation, does not
warrant his contention that the suit against him is malicious and
tortious; and since we have to decide defendant's counterclaim
upon the facts found by the Court of Appeals, we find no sufficient
basis upon which to sustain said counterclaim. Indeed, we feel
that a a matter of moral justice we ought to state here that the
indignant attitude adopted by the defendant towards the plaintiff
for having brought this action against him is in our estimation not
wholly right. Altho from the legal point of view he was not
personally liable for the fulfillment of the contract entered into by
him on behalf of the corporation of which he was the acting
president and manager, we think it was his moral duty towards the
party with whom he contracted in said capacity to see to it that the
corporation represented by him fulfilled the contract by delivering
the palay it had sold, the price of which it had already received.
Recreant to such duty as a moral person, he has no legitimate
cause for indignation. We feel that under the circumstances he
not only has no cause of action against the plaintiff for damages
but is not even entitled to costs.
The judgment of the Court of Appeals is reversed, and the
complaint is hereby dismissed, without any finding as to costs.
Yulo, C.J., Moran, Horrilleno and Bocobo, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 89879

April 20, 1990

JAIME PABALAN AND EDUARDO LAGDAMEO, petitioners,

vs.
NATIONAL LABOR RELATIONS COMMISSION, LABOR
ARBITER AMBROSIO B. SISON, ELIZABETH RODEROS, ET
AL., and THE SHERIFF OF THE NATIONAL LABOR
RELATIONS COMMISSION, respondents.
SYLLABUS

1. REMEDIAL LAW; JURISDICTION; DULY ACQUIRED IN CASE

AT BAR AS PARTIES WERE PROPERLY SERVED WITH
SUMMONS AND WERE NOT DEPRIVED OF DUE PROCESS.
Petitioners do not question the merits of the decision insofar as
PIF is concerned in this proceeding. The first two issues they
raised are to the effect that the public respondents never acquired
jurisdiction over them as they have not been served with
summons and thus they were deprived due process. The Court
finds these grounds to be devoid of merit. As the record shows
while originally it was PIF which was impleaded as respondent
before the labor arbiter, petitioners also appeared in their behalf
through counsel. Thereafter when the supplemental position
paper was filed by complainants, petitioners were impleaded as
respondents to which they filed an opposition inasmuch as they
filed their own supplemental position papers. They were therefore
properly served with summons and they were not deprived of due
process.
2. COMMERCIAL LAW; CORPORATION; VESTED BY LAW
WITH PERSONALITY SEPARATE AND DISTINCT FROM
STOCK-HOLDERS AND MEMBERS. Petitioners contend
however that under the circumstances of the case as officers of
the corporation PIF they could not be jointly and severally held
liable with the corporation for its liability in this case. The settled
rule is that the corporation is vested by law with a personality
separate and distinct from the persons composing it, including its
officers as well as from that of any other legal entity to which it
may be related. Thus, a company manager acting in good faith
within the scope of his authority in terminating the services of
certain employees cannot be held personally liable for damages.
Mere ownership by a single stockholder or by another corporation
of all or nearly all capital stocks of the corporation is not by itself
sufficient ground for disregarding the separate corporate
personality.
3. ID.; ID.; OFFICERS, NOT PERSONALLY LIABLE FOR THEIR
OFFICIAL ACTS; EXCEPTION, NOT APPLICABLE IN CASE AT
BAR. As a general rule, officers of a corporation are not
personally liable for their official acts unless it is shown that they
have exceeded their authority. However, the legal fiction that a
corporation has a personality separate and distinct from
stockholders and members may be disregarded as follows: "This
finding does not ignore the legal fiction that a corporation has a
personality separate and distinct from its stockholders and
members, for, as this Court had held "where the incorporators and
directors belong to a single family, the corporation and its
members can be considered as one in order to avoid its being

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CORPORATION LAW | 164

used as an instrument to commit injustice," or to further an end

subversive of justice. In the case of Claparols v. CIR involving
almost similar facts as in this case, it was also held that the shield
of corporate fiction should be pierced when it is deliberately and
maliciously designed to evade financial obligations to employees.
To the same effect . . . (are) this Courts rulings in still other cases:
When the notion of legal entity is used as a means to perpetrate
fraud or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, and or (to) confuse
legitimate issues the veil which protects the corporation will be
lifted." [A.C. Ransom Labor Union-CCLU v. NLRC, 150 SCRA
498, 505-506 (1987), Citations omitted. In this particular case
complainants did not allege or show that petitioners, as officers of
the corporation deliberately and maliciously designed to evade
the financial obligation of the corporation to its employees, or
used the transfer of the employees as a means to perpetrate an
illegal act or as a vehicle for the evasion of existing obligations,
the circumvention of statutes, or to confuse the legitimate issues.
It must be noted, however, that in A.C. Ransom Labor UnionCCLU v. NLRC, 150 SCRA 498, 5050-506 (1987), Citations
omitted the corporation was a family corporation and that during
the strike the members of the family organized another
corporation which was the Rosario Industrial Corporation to which
all the assets of the A.C. Ransom Corporation were transferred to
continue its business which acts of such officers and agents of
A.C. Ransom Corporation were intended to avoid payment of its
obligations to its employees. In such case this Court considered
the president of the corporation to be personally liable together
with the corporation for the satisfaction of the claim of the
employees. Not one of the above circumstances has been shown
to be present. Hence petitioners can not be held jointly and
severally liable with the PIF corporation under the questioned
decision and resolution of the public Respondent.

GANCAYCO, J.:
Once again the parameters of the liability of the officers of a
corporation as to unpaid wages and other claims of the
employees of a corporation which has a separate and distinct
personality are brought to fore in this case.
On October 20, 1987, eighty-four (84) workers of the Philippine
Inter-Fashion, Inc. (PIF) filed a complaint against the latter for
illegal transfer simultaneous with illegal dismissal without
justifiable cause and in violation of the provision of the Labor
Code on security of tenure as well as the provisions of Batas
Pambansa Blg. 130. Complainants demanded reinstatement with
full backwages, living allowance, 13th month pay and other
benefits under existing laws and/or separation pay.
On October 21, 1987, PIF, through its General Manager, was
notified about the complaint and summons for the hearing set for
November 6, 1987. The hearing was re-set for November 27,
1987 for failure of respondents to appear. On November 30, 1987
respondents (petitioners herein) moved for the cancellation of the
hearing scheduled on November 6, 1987 so that they could
engage a counsel to properly represent them preferably on
November 17, 1987.
On December 10, 1987 both parties were directed to submit their
respective position papers within ten (10) days. By mutual
agreement the hearing was re-set on December 21, 1987 but on
said date respondents and/or counsel failed to appear. The
hearing was re-set on January 14, 1988 on which date
respondents were given a deadline to submit their position paper.

On January 4, 1988 complainants filed their position paper. On

January 14, 1988 counsel for respondents moved that he be
given until January 22, 1988 to file their position paper. The labor
arbiter granted the motion. The PIF filed its position paper on
January 22, 1988. The heating for February 17, 1988 was re-set
to March 9, 1988 and on March 29, 1988 on which dates
respondents failed to appear.
On May 5, 1988, with leave of the labor arbiter, complainants filed
their supplemental position paper impleading the petitioners as
officers of the PIF in the complaint for their illegal transfer to a
new firm.
On July 13, 1988 a decision was rendered by the labor arbiter the
dispositive part of which reads as follows:
IN VIEW OF THE FOREGOING CONSIDERATION,
respondent Philippine Inter-Fashion and its officers Mr.
Jaime Pabalan and Mr. Eduardo Lagdameo are hereby
ordered to:
1. reinstate the sixty two (62) complainants to their
former or equivalent position without loss of seniority
rights and privileges;
2. to pay, jointly and severally, their backwages and
other benefits from the time they were dismissed up to
the time they are actually reinstated, the computation to
be based from the latest minimum wage law at the time
of their dismissal. (See attached Annex "A" of
complainants' position paper.)
SO ORDERED. 1
Not satisfied therewith petitioners filed a motion for
reconsideration in the First Division of the public respondent,
National Labor Relations Commission (NLRC), which
nevertheless, affirmed the appealed decision and dismissed the
appeal for lack of merit in a resolution dated June 30, 1989.
Petitioners were ordered to pay the appeal fee in accordance with
law.
Hence the herein petition for certiorari with prayer for the issuance
of a temporary restraining order wherein the petitioners raised the
following issues:
A
THE ARBITER AND THE NLRC DID NOT ACQUIRE
JURISDICTION OVER THE PERSONS OF THE
PETITIONERS AND, THEREFORE, THE DECISION
AND THE RESOLUTION, UNDER DISPUTE, ARE
NULL AND VOID.
B
THE DECISION AND THE NLRC RESOLUTION
SUFFER FROM A LEGAL AND CONSTITUTIONAL
INFIRMITY
BECAUSE
THEY
SANCTION
A
DEPRIVATION OF PETITIONERS' PROPERTIES
WITHOUT DUE PROCESS OF LAW.
C

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CORPORATION LAW | 165

THE ARBITER AND THE NLRC COMMITTED A

GRAVE ABUSE OF DISCRETION IN ADJUDGING
PETITIONERS
HEREIN
AS
JOINTLY
AND
SEVERALLY LIABLE WITH PHILIPPINE INTERFASHION, INC. TO PAY THE JUDGMENT DEBT.
On September 25, 1989 this Court dismissed the petition for
insufficiency in form and substance, having failed to comply with
the Rules of Court and Administrative Circular No. 1-88 requiting
the verification of the petition. A motion for reconsideration filed by
the petitioners of the said resolution was denied on October 16,
1989 for failure to raise any substantial arguments to warrant a
modification thereof. However, acting on an urgent motion to
include the motion for reconsideration of the resolution of
September 25, 1989 in the court's calendar which the Court
granted, on November 30, 1989 the Court resolved to set aside
said resolutions of September 25, 1989 and October 16, 1989,
and to require respondents to comment thereon within ten (10)
days from notice thereof. A temporary restraining order was
issued enjoining respondents from enforcing or implementing the
questioned decision of the labor arbiter affirmed by the NLRC
upon a bond to be filed by petitioners in the amount of
P100,000.00. However, on February 7, 1990 for failure of
petitioner to file the required bond despite extensions of time
granted them, the Court resolved to lift the temporary restraining
order issued on November 13, 1989.
Now to the merit of the petition.
Petitioners do not question the merits of the decision insofar as
PIF is concerned in this proceeding.1wphi1 The first two issues
they raised are to the effect that the public respondents never
acquired jurisdiction over them as they have not been served with
summons and thus they were deprived due process.
The Court finds these grounds to be devoid of merit. As the record
shows while originally it was PIF which was impleaded as
respondent before the labor arbiter, petitioners also appeared in
their behalf through counsel. Thereafter when the supplemental
position paper was filed by complainants, petitioners were
impleaded as respondents to which they filed an opposition
inasmuch as they filed their own supplemental position papers.
They were therefore properly served with summons and they
were not deprived of due process.
Petitioners contend however that under the circumstances of the
case as officers of the corporation PIF they could not be jointly
and severally held liable with the corporation for its liability in this
case.
The settled rule is that the corporation is vested by law with a
personality separate and distinct from the persons composing it,
including its officers as well as from that of any other legal entity
to which it may be related. Thus, a company manager acting in
good faith within the scope of his authority in terminating the
services of certain employees cannot be held personally liable for
damages. 2 Mere ownership by a single stockholder or by another
corporation of all or nearly all capital stocks of the corporation is
not by itself sufficient ground for disregarding the separate
corporate personality. 3
As a general rule, officers of a corporation are not personally
liable for their official acts unless it is shown that they have
exceeded their authority. 4 However, the legal fiction that a
corporation has a personality separate and distinct from
stockholders and members may be disregarded as follows:

This finding does not ignore the legal fiction that a

corporation has a personality separate and distinct from
its stockholders and members, for, as this Court had
held "where the incorporators and directors belong to a
single family, the corporation and its members can be
considered as one in order to avoid its being used as
an instrument to commit injustice," or to further an end
subversive of justice. In the case of Claparols vs. CIR
involving almost similar facts as in this case, it was also
held that the shield of corporate fiction should be
pierced when it is deliberately and maliciously designed
to evade financial obligations to employees.
To the same effect . . . (are) this Court's rulings in still
other cases:
When the notion of legal entity is used as a means to
perpetrate fraud or an illegal act or as a vehicle for the
evasion of an existing obligation, the circumvention of
statutes, and or (to) confuse legitimate issues the veil
which protects the corporation will be lifted. 5
In this particular case complainants did not allege or show that
petitioners, as officers of the corporation deliberately and
maliciously designed to evade the financial obligation of the
corporation to its employees, or used the transfer of the
employees as a means to perpetrate an illegal act or as a vehicle
for the evasion of existing obligations, the circumvention of
statutes, or to confuse the legitimate issues.
Indeed, in the questioned resolution of the NLRC dated June 30,
1989 there is no finding as to why petitioners were being held
jointly and severally liable for the liability and obligation of the
corporation except as to invocation of the ruling of this Court in
A.C. Ransom Labor Union-CCLU vs. NLRC 6 in that the liability in
the cases of illegal termination of employees extends not only to
the corporation as a corporate entity but also to its responsible
officers acting in the interest of the corporation or employer.
It must be noted, however, that A.C. Ransom Labor Union-CCLU
vs. NLRC the corporation was a family corporation and that during
the strike the members of the family organized another
corporation which was the Rosario Industrial Corporation to which
all the assets of the A.C. Ransom Corporation were transferred to
continue its business which acts of such officers and agents of
A.C. Ransom Corporation were intended to avoid payment of its
obligations to its employees. In such case this Court considered
the president of the corporation to be personally liable together
with the corporation for the satisfaction of the claim of the
employees. 7
Not one of the above circumstances has been shown to be
present. Hence petitioners can not be held jointly and severally
liable with the PIF corporation under the questioned decision and
resolution of the public respondent.
WHEREFORE, the petition is GRANTED and the questioned
resolution of the public respondent dated June 30, 1989 is hereby
modified by relieving petitioners of any liability as officers of the
PIF and holding that the liability shall be solely that of Philippine
Inter-Fashion, Inc. No costs.
SO ORDERED.
Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.

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Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-66394 February 5, 1990
PARADISE SAUNA, MASSAGE CORPORATION and JUANITO
UY, plaintiff-appellee,
vs.
ALEJANDRO NG AND THE INTERMEDIATE APPELLATE
COURT, defendants-appellants.
Whether or not the contract between the petitioners and the private

respondent is a lease or a management contract is the issue in

this petition for review. The petitioners assail the decision of the
then Intermediate Appellate Court in AC-G.R. CV No. 65264
which affirmed in toto the judgment of the Court of First Instance
of Manila, Branch XII declaring the said contract as one of lease.
The disputed letter-contract signed by petitioner Juanito Uy in his
capacity as President of the petitioner corporation reads:
Mr. Alejandro Ng
No. 8-A Boston Street
Quezon City
Dear Mr. Ng,
By authority of the Board of Directors, you are hereby
appointed to MANAGE and ADMINISTER the PARADISE
SAUNA and MASSAGE CORPORATION effective January
1, 1976, under a commission basis over and above the
amount of EIGHT THOUSAND PESOS (P8,000.00) which
should be remitted to us not later than the first five (5) days
of each month starting January 1, 1976.
In addition, you are to fulfill the following terms and
conditions:
1. You are to remit the amount of Sixteen Thousand
Pesos (Pl6,000.00) immediately after accepting this
appointment as a guarantee bond for the faithful
performance of your duties and responsibilities.
However, this amount shall be returned to you after
the duration of your appointment which will be up to
September 30, 1979. Otherwise, it will be forfeited if
you do not comply with all your duties and
responsibilities.
2. Further, all government licenses, permits, utilities
and services in the premises such as water, gas,
electricity, telephone, additional air conditioning units
and the installation and repairs thereof and all other
repairs therein during your management shall be for
your account;
3. The sole control and management of the premises
shall belong to you and you are not responsible to
Anybody nor to Any Board of Directors except to me
alone;

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CORPORATION LAW | 167

4. You are empowered to make any renovation,

repairs and improvements but expenses shall be for
your account as well as to change or add personnels
therein;
5. Please take all good care of all the equipment and
facilities presently existing therein and see to it that
they are always in good working condition;
Otherwise, the. loss and damage on any of this
equipment and facilities shall be borne by you;
6. In case, however, that you will not be in a position
to continue Managing and Administering the
business profitably due to any Government Rules,
Decree or Regulations or Force Majeure this
appointment shall be suspended for a period of 3
months for the purpose of determining whether or not
you can still continue managing the same.
Hoping that you find the same satisfactory
and good luck.

1977, the petitioners, assisted by Metrocom soldiers, entered the

private respondent's office and through intimidations, forcibly
ejected him from the premises, assumed full control and
supervision of the business and put another person in his place
who immediately took possession of all cash sales for the day;
that the private respondent returned to the business premises the
following day but he was refused entry and there was a notice to
all the employees in front of the premises signed by the
petitioners to the effect that the private respondent's services had
been terminated and that another person had been appointed to
take his place; that for having breached their contract, the private
respondent suffered damages in the amount of not less than
P100,000.00 representing unrealized profits from the operation of
the business, forfeiture of the guarantee bond and value of his
personal properties placed in the business which the petitioners
appropriated to themselves; that the private respondent shall
prove further actual damages in the course of the trial resulting
from the petitioners' failure to reinstate the former immediately;
and that the private respondent is entitled to moral damages in
the amount of P50,000.00 and attorney's fees in the amount of
P30,000.00.

In their answer, the petitioners counter-alleged, among others,

that the petitioner corporation is the operator of the sauna bath
(Sgd)
JUANITO
A.
UY
and
massage establishment
in question, that petitioner Uy was
President/Director
( manager and administrator of the said establishment
the former
which was then fully equipped and staffed with more than thirty
(30) personnel consisting of hospitality attendants and boyThis case arose from the petitioners' act of allegedly terminating
helpers; that the petitioner corporation is paying P4,000.00 as
the respondent's appointment as manager-administrator as a
lease rentals for the premises occupied by it, that in his capacity
result of his alleged failure to comply with the terms and
as President-Director of the petitioner corporation and in his
conditions of his appointment. The termination took effect on
desire to expand the operations of the same, petitioner Uy
January 15,1977.
relinquished his position as manager-administrator of the said
establishment in favor of the private respondent as evidenced by
Private respondent Ng, on January 21, 1977 filed with the Court
the letter dated December 30, 1975 addressed to the latter; that
of First Instance of Manila, Branch XII, a case for specific
private respondent's appointment as manager-administrator was
performance and damages with prayer for a writ of preliminary
terminated on January 15, 1977 for violations of the terms and
mandatory injunction and attorney's fees against the petitioner.
conditions of his appointment, namely, failure to pay water and
The case was docketed as Civil Case No. 106511.
electric bills, failure to pay the salaries of the employees of the
petitioner corporation, failure to supply the provisions necessary
for the conduct of the petitioners' sauna and massage business
On January 28, 1977, the private respondent amended his
like lotion, towels and blankets, failure to perform efficiently as
complaint to one for breach of contract with damages with the
manager-administrator of the petitioner corporation by managing
same prayer for a writ of preliminary injunction and attorney's
the Rajah Sauna Bath in Ermita, Manila simultaneously with his
fees.
management of the petitioner corporation and by inducing the
petitioners' customers to patronize the said Rajah Sauna Bath
The amended complaint alleged, among others, that on
instead of the petitioner corporation.
December 30, 1975, the petitioners agreed to lease in favor of the
private respondent their business called "Paradise Sauna and
After trial, the lower court, on December 23, 1978 rendered
Massage Corporation" located at E. Rodriguez, Sr. Avenue,
judgment in favor of the private respondent with the following
Quezon City and that they entered into a contract whereby the
dispositive portion:
latter shall have full control and management of the said business
effective January 1, 1976 until September 30,1979; that as lessee
of the said business with full and sole control thereof, private
IN
VIEW
OF
THE
FOREGOING
respondent's principal obligation consists of only paying the
CONSIDERATIONS, the Court hereby
petitioners the sum of eight thousand pesos (P8,000.00 ) not later
renders judgment:
than the first five (5) days of each month as rentals and remitting
to the latter the sum of sixteen thousand pesos ( P16,000.00 ) as
(a) declaring the letter-contract, Exhibit A, as
guarantee bond; that as such lessee, the private respondent
a contract of lease covering the paradise
assumed control and management of the petitioner's business on
sauna bath and massage clinic, and not a
January 1, 1976, hired and paid personnel to beef up its
contract of employment ;
operations and tried religiously to comply with his obligations like
paying for his account all government licenses, permits, utilities
and services in the premises such as water, gas, electricity and
(b) directing defendants to forthwith return the
telephone; that the private respondent paid all the monthly rentals
management and operation of the paradise
due the petitioners until December 1976; that the petitioner
sauna bath and massage clinic to the plaintiff,
refused to accept the rental for January 1977 and asked the
so that plaintiff can operate and manage the
private respondent to vacate and leave the premises instead
same for the unexpired term of the lease of
thereby terminating his services and forfeiting his guarantee bond
of sixteen thousand pesos ( P16,000.00 ); that on January 16,

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CORPORATION LAW | 168

Two (2) Years, Eight (8) Months and Fifteen

(15) days;

thereon at 6% per annum from the date of

this decision, until it is fully paid;

(c) declaring the forfeiture by defendants of

the plaintiffs deposit of P16,000.00 as null
and void and declaring it as subsisting for the
purpose of which it was put up by plaintiff, if
Exhibit A is made to continue, as decreed in
par. (b) hereof, otherwise, if or for any reason
Exhibit A can not continue to be in force,
directing defendants to jointly and severally
pay to plaintiff the said sum of P16,000.00;

(g) directing the defendants to account for

and return to plaintiff all of Items 1 to 17 listed
on page 2 of Exh. R, or in default thereof, to
pay jointly and severally the plaintiff the sum
of P2,968.03, with interest thereon of 6% per
annum from date of this decision until it is
fully paid;

(d) directing the defendants to account for

and return to the plaintiff all the articles listed
in Exhibit R, consisting of pages 1, 2 and 3,
or in default thereof, to jointly and severally
pay to the plaintiff in the following manner
and in the following amount, as far as it is
practicable, to wit:
(1) P4,650.00 for the
cost of two television
(sic) and the refrigerator,
with an allowance of
30% for depreciation
costs,
with
interest
thereon at the legal rate
from date of this decision
until it is fully paid;
(2) P11,540.30 Cost
price of certain items
listed in page l of Exhibit
R as recited elsewhere in
the body of this decision,
with interest thereon at
the legal rate from the
date of this decision until
it is fully paid;
(e) directing the defendants to account for
and to return to the plaintiff one rice cooker,
one gas lantern, one medicine cabinet with
assorted medicines, one Akai Tape Recorder,
Sixteen glass tumblers, five coffee cups, four
intercom, two telephone hands (sic), one
Video, one color vibrator, eight drawerlocks,
one electric fan with stand, one steel cabinet
with lock, 40 pieces nameplates with pictures,
30 cans Acaho, and two speakers with
cabinet, all of which are listed on page 1 of
Exhibit R, and in default of such delivery,
directing defendants to pay jointly and
severally the reasonable value thereof taking
into consideration the present costs of such
items, with allowances of at least thirty per
cent for their depreciation costs, with
interests thereon at 6% per annum from date
of this decision until it is fully paid;
(f) directing defendants to account for and
return to plaintiffs all the articles listed in page
2 of Exhibit R, or in default thereof, directing
defendants to pay jointly and severally to
plaintiff the sum of P l,313.42, with interest

(h) directing the defendants to account for

and return to plaintiff all of the last six items
listed on page 2 of Exhibit R, or in default
thereof, to pay jointly and severally the
plaintiff the total costs of P7,999.55, with an
allowance of 30% for their depreciation costs,
and with interest thereon at 6% per annum
until it is fully paid;
(i) directing the defendants to account for and
return to plaintiff all the articles listed on page
3 of Exhibit R, or in default thereof, to jointly
and severally pay to the plaintiff the cost price
of P1,313.43, with interest thereon at the
legal rate from date of this decision until it is
fully paid;
(j) directing the defendants to pay jointly and
severally to the plaintiff the sums of
P50,000.00 as moral damages and P50,000
as exemplary damages;
(k) directing the plaintiff to pay defendants the
sum of P28,572.45, with legal interest
thereon from date of this decision until it is
fully paid. This sum shall be set off and made
to reduce plaintiffs entitlement as awarded by
this Court;
(l) dismissing all other claims which the
parties have against each other for lack of
merit;
Costs against defendants. (Pp. 111 to 114,
Record on Appeal). (At pp. 24-27, Rollo)
On appeal, the then Intermediate Appellate Court, on November
29, 1983, affirmed in toto the decision of the trial court. The
subsequent motion for reconsideration by the petitioners was
denied. Hence, this petition which presents three main
arguments.
Firstly, the petitioners contend that the respondent Court
sanctioned a legal error made by the trial court which is the
reformation of Exhibit A from a management contract to a lease
contract contrary to Art. 1367 of the New Civil Code. In support of
their contention, they averred that when respondent Ng filed an
action for specific performance then for breach of contract later,
he should have been presumed to have admitted the due
execution and contents of the letter-contract marked as Exhibit A
whereby he was appointed as manager-administrator of the
petitioner corporation and he should never have been allowed to
deny the contents thereof for purposes of reforming the said
instrument. Article 1367 of the Civil Code states that:

VOLENTI NON FIT INJURIA

CORPORATION LAW | 169

Art. 1367When one of the parties has

brought an action to enforce the instrument,
he cannot subsequently ask for its
reformation.
The above quoted provision of law invoked by the petitioners
cannot apply to respondent Ng's case. When Ng amended his
original complaint for specific performance which calls for an
enforcement of Exhibit A to one for breach of contract, he did so
as a matter of right since no responsive pleading had been filed
yet by the petitioners. The original complaint was filed on January
21, 1977 and was amended on January 28, 1977. The answer of
the petitioners to the original complaint was filed only on February
4, 1977. Under Section 2, Rule 10 of the Revised Rules of Court,
"a party may amend his pleading once as a matter of course at
any time before a responsive pleading is served . . . ." When a
pleading is amended, the original one is deemed abandoned.
Hence, the amended pleading replaces the original one which no
longer forms part of the record and the trial of the case is made
on the basis of the amended pleading only (see Ruymann and
Farris v. Director of Lands et al., 34 Phil. 428 [1916]). In the case
at bar, respondent Ng, in his amended complaint brought an
action for breach of contract not to enforce his rights as manageradministrator but as lessee of the petitioner corporation. In the
course of the trial, parol evidence was introduced to prove that the
contract in question was not a management contract as it
appeared on its face but a lease contract.
Rule 130, Sec. 7 of the Revised Rules of Court provides that:
Sec. 7. Evidence of written agreements.
When the terms of an agreement have been
reduced to writing, it is to be considered as
containing all such terms, and, therefore,
there can be, between the parties and their
successors-in-interest, no evidence of the
terms of the agreement other than the
contents of the writing, except in the following
cases:
(a) Where a mistake or imperfection of the
writing, or its failure to express the true intent
and agreement of the parties, or the validity
of the agreement is put in issue by the
pleadings;
(b) When there is an intrinsic ambiguity in the
writing.
The term "agreement"
(Emphasis supplied)

includes

wills.

In the instant case, the failure of a contract to express the true

intent and agreement of the parties is raised. The fact that the
allegations of respondent Ng with respect to his rights as lessee
of the petitioner corporation were made on the basis of' Exhibit A
which was marked as Annex "A" in the amended complaint meets
the procedural requirement that said failure be put in issue by the
pleadings.
In ruling that the subject contract is a lease contract and not a
management contract, we adopt the findings of fact made by the
trial court and affirmed by the respondent court.

The claim of the petitioners that respondent Ng is their manageradministrator is untenable since it fails to pass the control test
pertinent to the existence of an employer-employee relationship.
The control test asks whether the employer controls or has
reserved the right to control the employee not only as to the result
of the work but also as to the means and methods by which the
said work is to be accomplished (Social Security System v. Court
of Appeals, 156 SCRA 383 [1987]). Such control by the petitioners
over respondent Ng is lacking. Exhibit A is in the nature of a lease
contract under Art. 1643 of the Civil Code which states that:
Art. 1643. In the lease of things, one of the
parties binds himself to give to another the
enjoyment or use of a thing for a price
certain, and for a period which may be
definite or indefinite. However, no lease for
more than ninety-nine (99) years shall be
valid.
We find no reason to disturb the findings of the two courts below
that the disputed contract is a lease contract. The reasons given
are:
(1) The respondent paid the petitioners a
fixed P8,000.00 monthly even when the
business suffers a loss. The P8,000.00 was
paid at the start of the month with no
attention paid to operating expenses, profits,
and losses.
(2) The monthly receipts received by the
petitioners from Alejandro Ng state that they
were given for rentals from January to
October 1976. The receipts for November
and
December
substitute
the
word
"commission" for "rental". The respondent
explained the change by stating that
petitioner Uy changed the receipt as he
realized that subleasing the premises to Ng
was a violation of the contract with the owner
and the latter might discover the violation.
The receipts were prepared by the petitioners
but signed in the presence of the respondent
when payment was made.
(3) The respondent was responsible for all
licenses, permits, utilities and services,
including the installation and repair of all
equipment such as airconditioning units. He
had sole control and management and did
not report to anybody.
Anent the argument that the respondent Court, in holding
petitioner Uy severally liable with the petitioner corporation,
departed from the rule that a stockholder or officer of a
corporation has a personality distinct from the corporation, we
hold that the corporate entity theory cannot apply in the instant
case where it is being invoked as a cloak or shield for illegality.
(see Tan Boon Bee & Co., Inc. v. Judge Jarencio, 163 SCRA 205
[1988]), There is proof obtaining in the case at bar as to the real
nature of Exhibit A. Thus, being a party to a simulated contract of
management, petitioner Uy cannot be permitted to escape liability
under the said contract by using the corporate entity theory. This
is one instance when the veil of corporate entity has to be pierced
to avoid injustice and inequity.

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CORPORATION LAW | 170

Lastly, the petitioners argue that the respondent Court's award of

moral and exemplary damages was contrary to law as there was
no showing of bad faith. In this case, the petitioners' manner of
barring respondent Ng from his place of business with the use of
Metrocom soldiers instead of availing of the proper legal action
constituted bad faith as contemplated by law considering that the
petitioners were aware of the real nature of the contract in
question. The amount of P8,000.00 given monthly to the
petitioners was received as "rentals" and not as "commissions."
Only the later receipts indicated that the P8,000.00 was for
payment of "commission" and respondent Ng explained that the
change in the phraseology of the receipts was due to the fact that
petitioner Uy wanted them to be so written since subleasing would
constitute a violation of the latter's contract with the owner of the
business premises. Moral damages are recoverable in cases of
breach of contract where the defendant acted fraudulently or in
bad faith (Art. 2220, New Civil Code). Exemplary damages, as
well may be awarded in contracts if the defendant acted in a
wanton, fraudulent, reckless, oppressive or malevolent manner
(Art. 2232, New Civil Code).
We feel, however, that the amount of moral and exemplary
damages may be reduced considering the circumstances of the
case. Mr. Uy was unhappy about the continued life of the lease
arrangement and Mr. Ng was aware of this. In some instances,
rental payments were not made promptly at the start of the
month. Three checks initially bounced. Damage to the central
airconditioning system and other equipment was not repaired. Mr.
Ng also operated another massage and sauna parlorThe Rajah
Sauna Bath in Ermitaand Mr. Uy was convinced that personnel
and customers of Paradise Sauna were being enticed by the
respondent to the other place thus eroding the goodwill and
patronage of the complaining establishment. All of these,
however, mitigate but do not justify the acts accompanying the
termination of the contract.
WHEREFORE, IN VIEW OF THE FOREGOING, the instant
petition is DISMISSED. The judgment appealed from is
AFFIRMED with the MODIFICATION that the award of moral and
exemplary damages is hereby reduced to a total of P20,000. The
term of the lease having expired, the order to return the massage
clinic to the private respondent is DELETED.
SO ORDERED.

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CORPORATION LAW | 171

potestative (or facultative) and resolutory may be valid, even

though the saving clause is left to the will of the obligor.
2. ID.; ID.; ID.; RIGHT OF STOPPAGE GUARANTEED IN THE
CONTRACT, HELD INOPERATIVE; REASON. Petitioners are
of the impression that the letter dated September 30, 1968 sent to
private respondents is well within the right of stoppage
guaranteed to them by paragraph 7 of the contract of sale which
was construed by petitioners to be a temporary suspension of
deliveries. There is no doubt that the contract speaks loudly about
petitioners prerogative but what diminishes the legal efficacy of
such right is the condition attached to it which, as aforesaid, is
dependent exclusively on their will for which reason, We have no
alternative but to treat the controversial stipulation as inoperative
(Article 1306, New Civil Code). It is for this same reason that We
are not inclined to follow the interpretation of petitioners that the
suspension of delivery was merely temporary since the nature of
the suspension itself is again conditioned upon petitioners
determination of the sufficiency of supplies at the plant.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 70789 October 19, 1992

RUSTAN PULP & PAPER MILLS, INC., BIENVENIDO R.
TANTOCO, SR., and ROMEO S. VERGARA, petitioners,
vs.
THE INTERMEDIATE APPELLATE COURT and ILIGAN
DIVERSIFIED PROJECTS, INC., ROMEO A. LLUCH and
ROBERTO G. BORROMEO, respondents.
SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACT; POTESTATIVE

CONDITION; MAYBE OBLITERATED WITHOUT AFFECTING
THE REST OF THE STIPULATIONS. The matter of Tantocos
and Vergaras joint and several liability as a result of the alleged
breach of the contract is dependent, first of all, on whether Rustan
Pulp and Paper Mills may legally exercise the right of stoppage
should there be a glut of raw materials at its plant.
And insofar as the express discretion on the part of petitioners is
concerned regarding the right of stoppage, We feel that there is
cogent basis for private respondents apprehension on the illusory
resumption of deliveries inasmuch as the prerogative suggests a
condition solely dependent upon the will of petitioners. Petitioners
can stop delivery of pulp wood from private respondents if the
supply at the plant is sufficient as ascertained by petitioners,
subject to re-delivery when the need arises as determined
likewise by petitioners. This is Our simple understanding of the
literal import of paragraph 7 of the obligation in question. A purely
potestative imposition of this character must be obliterated from
the face of the contract without affecting the rest of the
stipulations considering that the condition relates to the fulfillment
of an already existing obligation and not to its inception. It is, a
truism in legal jurisprudence that a condition which is both

3. ID.; ID.; FRUSTRATION OF COMMERCIAL OBJECT AS

GROUND FOR TERMINATION OF THE CONTRACT, NOT
ACCEPTABLE; REASONS. Neither are We prepared to accept
petitioners exculpation grounded on frustration of the commercial
object under Article 1267 of the New Civil Code, because
petitioners continued accepting deliveries from the suppliers. This
conduct will estop petitioners from claiming that the breakdown of
the machinery line was an extraordinary obstacle to their
compliance to the prestation. It was indeed incongruous for
petitioners to have sent the letters calling for suspension and yet,
they in effect disregarded their own advice by accepting the
deliveries from the suppliers. Knowing fully well that they will
encounter difficulty in producing output because of the defective
machinery line, petitioners opted to open the plant to greater loss,
thus compounding the costs by accepting additional supply to the
stockpile. Verily, the Appellate Court emphasized the absurdity of
petitioners action when they acknowledged that "if the plant could
not be operated on a commercial scale, it would then be illogical
for defendant Rustan to continue accepting deliveries of raw
materials."cralaw
virtua1aw
library
4. ID.; AGENCY; OFFICERS OF CORPORATIONS NOT LIABLE
INDIVIDUALLY UNDER THE CONTRACT SIGNED BY THEM IN
THEIR OFFICIAL CAPACITY; EXCEPTION. We have to agree
with petitioners citation of authority to the effect that the President
and Manager of a corporation who entered into and signed a
contract in his official capacity, cannot be made liable thereunder
in his individual capacity in the absence of stipulation to that effect
due to the personality of the corporation being separate and
distinct from the persons composing it (Bangue Generale Belge v.
Walter Bull and Co., Inc., 84 Phil. 164). And because of this
precept, Vergaras supposed non-participation in the contract of
sale although he signed the letter dated September 30, 1968 is
completely immaterial. The two exceptions contemplated by
Article 1897 of the New Civil Code where agents are directly
responsible are absent and wanting.

MELO, J.:
When petitioners informed herein private respondents to stop the
delivery of pulp wood supplied by the latter pursuant to a contract
of sale between them, private respondents sued for breach of
their covenant. The court of origin dismissed the complaint but at
the same time enjoined petitioners to respect the contract of sale
if circumstances warrant the full operation in a commercial scale
of petitioners' Baloi plant and to continue accepting and paying for

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deliveries of pulp wood products from Romeo Lluch (page 14,

Petition; page 20, Rollo). On appeal to the then Intermediate
Appellate Court, Presiding Justice Ramon G. Gaviola, Jr., who
spoke for the First Civil Cases Division, with Justices Caguioa,
Quetulio-Losa, and Luciano, concurring, modified the judgment by
directing herein petitioners to pay private respondents, jointly and
severally, the sum of P30,000.00 as moral damages and
P15,000.00 as attorney's fees (pages 48-58, Rollo).
In the petition at bar, it is argued that the Appellate Court erred;
A. . . . IN HOLDING PERSONALLY LIABLE
UNDER THE CONTRACT OF SALE
PETITIONER TANTOCO WHO SIGNED
MERELY AS
REPRESENTATIVE
OF
PETITIONER RUSTAN, AND PETITIONER
VERGARA WHO DID NOT SIGN AT ALL;
B. . . . IN HOLDING THAT PETITIONER
RUSTAN'S DECISION TO SUSPEND
TAKING DELIVERY OF PULP WOOD FROM
RESPONDENT LLUCH, WHICH WAS
PROMPTED
BY
SERIOUS
AND
UNFORESEEN DEFECTS IN THE MILL,
WAS NOT IN THE LAWFUL EXERCISE OF
ITS RIGHTS UNDER THE CONTRACT OF
SALE; and
C. . . . IN AWARDING MORAL DAMAGES
AND ATTORNEY'S FEES IN THE ABSENCE
OF FRAUD OR BAD FAITH.

shall have been established to have

emanated from the SELLER'S lumber and/or
firewood concession. . . .
And that SELLER has the priority to supply
the pulp wood materials requirement of the
BUYER;
xxx xxx xxx
7. That the BUYER shall have the right to
stop delivery of the said raw materials by the
seller covered by this contract when supply of
the same shall become sufficient until such
time when need for said raw materials shall
have become necessarily provided, however,
that the SELLER is given sufficient notice.
(pages 8-9, Petition; pages 14-15, Rollo)
In the installation of the plant facilities, the technical staff of
Rustan Pulp and Paper Mills, Inc. recommended the acceptance
of deliveries from other suppliers of the pulp wood materials for
which the corresponding deliveries were made. But during the test
run of the pulp mill, the machinery line thereat had major defects
while deliveries of the raw materials piled up, which prompted the
Japanese supplier of the machinery to recommend the stoppage
of the deliveries. The suppliers were informed to stop deliveries
and the letter of similar advice sent by petitioners to private
respondents reads:

September 30, 1

(page 18, Petition; page 24, Rollo)

The generative facts of the controversy, as gathered from the
pleadings, are fairly simple.
Sometime in 1966, petitioner Rustan established a pulp and
paper mill in Baloi, Lano del Norte. On March 20, 1967,
respondent Lluch, who is a holder of a forest products license,
transmitted a letter to petitioner Rustan for the supply of raw
materials by the former to the latter. In response thereto,
petitioner Rustan proposed, among other things, in the letterreply:
2. That the contract to supply is not exclusive
because Rustan shall have the option to buy
from other suppliers who are qualified and
holder of appropriate government authority or
license to sell and dispose pulp wood.
These prefatory business proposals culminated in the execution,
during the month of April, 1968, of a contract of sale whereby
Romeo A. Lluch agreed to sell, and Rustan Pulp and Paper Mill,
Inc. undertook to pay the price of P30.00 per cubic meter of pulp
wood raw materials to be delivered at the buyer's plant in Baloi,
Lanao del Norte. Of pertinent significance to the issue at hand are
the following stipulations in the bilateral undertaking:
3. That BUYER shall have the option to buy
from other SELLERS who are equally
qualified and holders of appropriate
government authority or license to sell or
dispose, that BUYER shall not buy from any
other seller whose pulp woods being sold

Iligan
Diversified
Iligan City

Projects,

Inc.

Attention: Mr. Romeo A. Lluch

Dear Mr. Lluch:
This is to inform you that the supply of raw
materials to us has become sufficient and we
will not be needing further delivery from you.
As per the terms of our contract, please stop
delivery thirty (30) days from today.

Very truly yours

RUSTAN
MILLS, INC.

By:

DR.
Resident Manag
Private respondent Romeo Lluch sought to clarify the tenor of the
letter as to whether stoppage of delivery or termination of the
contract of sale was intended, but the query was not answered by
petitioners. This alleged ambiguity notwithstanding, Lluch and the
other suppliers resumed deliveries after the series of talks
between Romeo S. Vergara and Romeo Lluch.

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On January 23, 1969, the complaint for contractual breach was

filed which, as earlier noted, was dismissed. In the process of
discussing the merits of the appeal interposed therefrom,
respondent Court clarified the eleven errors assigned below by
herein petitioners and it seems that petitioners were quite
satisfied with the Appellate Court's in seriatim response since
petitioners trimmed down their discourse before this Court to
three basic matters, relative to the nature of liability, the propriety
of the stoppage, and the feasibility of awarding moral damages
including attorney's fees.
Respondent Court found it ironic that petitioners had to exercise
the prerogative regarding the stoppage of deliveries via the letter
addressed to Iligan Diversified Project, Inc. on September 30,
1968 because petitioners never really stopped accepting
deliveries from private respondents until December 23, 1968.
Petitioner's paradoxial stance portrayed in this manner:
. . . We cannot accept the reasons given by
appellees as to why they were stopping
deliveries of pulp wood materials. First, We
find it preposterous for a business company
like the appellee to accumulate stockpiles of
cut wood even after its letter to appellants
dated September 30, 1968 stopping the
deliveries because the supply of raw
materials has become sufficient. The fact that
appellees were buying and accepting pulp
wood materials from other sources other than
the appellants even after September 30,
1968 belies that they have more than
sufficient supply of pulp wood materials, or
that they are unable to go into full commercial
operation or that their machineries are
defective or even that the pulp wood
materials coming from appellants are substandard. Second, We likewise find the court
a quo's finding that "even with one
predicament in which defendant Rustan
found itself wherein commercial operation
was delayed, it accommodated all its
suppliers of raw materials, including plaintiff,
Romeo Lluch, by allowing them to deliver all
its stockpiles of cut wood" (Decision, page
202, Record on Appeal) to be both illogical
and inconsistent. Illogical, because as
appellee Rustan itself claimed "if the plant
could not be operated on a commercial scale,
it would then be illogical for defendant Rustan
to continue accepting deliveries of raw
materials." Inconsistent because this kind of
"concern" or "accommodation" is not usual or
consistent with ordinary business practice
considering that this would mean adequate
losses to the company. More so, if We
consider that appellee is a new company and
could not therefore afford to absorb more
losses than it already allegedly incurred by
the consequent defects in the machineries.
Clearly therefore, this is a breach of the
contract entered into by and between
appellees and appellants which warrants the
intervention of this Court.
xxx xxx xxx

. . . The letter of September 30, 1968, Exh.

"D" shows that defendants were terminating
the contract of sale (Exh. "A"), and refusing
any future or further delivery whether on
the ground that they had sufficient supply of
pulp wood materials or that appellants cannot
meet the standard of quality of pulp wood
materials that Rustan needs or that there
were defects in appellees' machineries
resulting in an inability to continue full
commercial operations.
Furthermore, there is evidence on record that
appellees have been accepting deliveries of
pulp wood materials from other sources, i.e.
Salem Usman, Fermin Villanueva and
Pacasum even after September 30, 1968.
Lastly, it would be unjust for the court a quo
to rule that the contract of sale be temporarily
suspended until Rustan, et al., are ready to
accept deliveries from appellants. This would
make the resumption of the contract purely
dependent on the will of one party the
appellees, and they could always claim, as
they did in the instant case, that they have
more than sufficient supply of pulp wood
when in fact they have been accepting the
same from other sources. Added to this, the
court a quo was imposing a new condition in
the contract, one that was not agreed upon
by the parties.
(Pages B-10, Decision; Pages 55-57, Rollo)
The matter of Tantoco's and Vergara's joint and several liability as
a result of the alleged breach of the contract is dependent, first of
all, on whether Rustan Pulp and Paper Mills may legally exercise
the right of stoppage should there be a glut of raw materials at its
plant.
And insofar as the express discretion on the part of petitioners is
concerned regarding the right of stoppage, We feel that there is
cogent basis for private respondent's apprehension on the illusory
resumption of deliveries inasmuch as the prerogative suggests a
condition solely dependent upon the will of petitioners. Petitioners
can stop delivery of pulp wood from private respondents if the
supply at the plant is sufficient as ascertained by petitioners,
subject to re-delivery when the need arises as determined
likewise by petitioners. This is Our simple understanding of the
literal import of paragraph 7 of the obligation in question. A purely
potestative imposition of this character must be obliterated from
the face of the contract without affecting the rest of the
stipulations considering that the condition relates to the fulfillment
of an already existing obligation and not to its inception (Civil
Code Annotated, by Padilla, 1987 Edition, Volume 4, Page 160). It
is, of course, a truism in legal jurisprudence that a condition which
is both potestative (or facultative) and resolutory may be valid,
even though the saving clause is left to the will of the obligor like
what this Court, through Justice Street, said in Taylor vs. Uy Tieng
Piao and Tan Liuan (43 Phil. 873; 879; cited in Commentaries and
Jurisprudence on the Civil Code, by Tolentino, Volume 4, 1991
edition, page 152). But the conclusion drawn from the Taylor
case, which allowed a condition for unilateral cancellation of the
contract when the machinery to be installed on the factory did not
arrive in Manila, is certainly inappropriate for application to the
case at hand because the factual milieu in the legal tussle

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dissected by Justice Street conveys that the proviso relates to the

birth of the undertaking and not to the fulfillment of an existing
obligation.

ordered to pay moral damages and attorney's fees as awarded by

respondent Court.
SO ORDERED.

In support of the second ground for allowance of the petition,

petitioners are of the impression that the letter dated September
30, 1968 sent to private respondents is well within the right of
stoppage guaranteed to them by paragraph 7 of the contract of
sale which was construed by petitioners to be a temporary
suspension of deliveries. There is no doubt that the contract
speaks loudly about petitioners' prerogative but what diminishes
the legal efficacy of such right is the condition attached to it which,
as aforesaid, is dependent exclusively on their will for which
reason, We have no alternative but to treat the controversial
stipulation as inoperative (Article 1306, New Civil Code). It is for
this same reason that We are not inclined to follow the
interpretation of petitioners that the suspension of delivery was
merely temporary since the nature of the suspension itself is
again conditioned upon petitioner's determination of the
sufficiency of supplies at the plant.

Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.

Neither are We prepared to accept petitioners' exculpation

grounded on frustration of the commercial object under Article
1267 of the New Civil Code, because petitioners continued
accepting deliveries from the suppliers. This conduct will estop
petitioners from claiming that the breakdown of the machinery line
was an extraordinary obstacle to their compliance to the
prestation. It was indeed incongruous for petitioners to have sent
the letters calling for suspension and yet, they in effect
disregarded their own advice by accepting the deliveries from the
suppliers. The demeanor of petitioners along this line was sought
to be justified as an act of generous accommodation, which
entailed greater loss to them and "was not motivated by the usual
businessman's obsession with profit" (Page 34, Petition; Page 40,
Rollo). Altruism may be a noble gesture but petitioners' stance in
this respect hardly inspires belief for such an excuse is
inconsistent with a normal business enterprise which takes
ordinary care of its concern in cutting down on expenses (Section
3, (d), Rule 131, Revised Rules of Court). Knowing fully well that
they will encounter difficulty in producing output because of the
defective machinery line, petitioners opted to open the plant to
greater loss, thus compounding the costs by accepting additional
supply to the stockpile. Verily, the petitioner's action when they
acknowledged that "if the plant could not be operated on a
commercial scale, it would then be illogical for defendant Rustan
to continue accepting deliveries of raw materials." (Page 202,
Record on Appeal; Page 8, Decision; Page 55, Rollo).
Petitioners argue next that Tantoco and Vergara should not have
been adjudged to pay moral damages and attorney's fees
because Tantoco merely represented the interest of Rustan Pulp
and Paper Mills, Inc. while Romeo S. Vergara was not privy to the
contract of sale. On this score, We have to agree with petitioners'
citation of authority to the effect that the President and Manager
of a corporation who entered into and signed a contract in his
official capacity, cannot be made liable thereunder in his individual
capacity in the absence of stipulation to that effect due to the
personality of the corporation being separate and distinct from the
person composing it (Bangued Generale Belge vs. Walter Bull
and Co., Inc., 84 Phil. 164). And because of this precept,
Vergara's supposed non-participation in the contract of sale
although he signed the letter dated September 30, 1968 is
completely immaterial. The two exceptions contemplated by
Article 1897 of the New Civil Code where agents are directly
responsible are absent and wanting.
WHEREFORE, the decision appealed from is hereby MODIFIED
in the sense that only petitioner Rustan Pulp and Paper Mills is

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EPG CONSTRUCTION COMPANY, INC., and EMMANUEL P.

DE GUZMAN, petitioner,
vs.
HONARABLE COURT OF APPEALS (17th Division),
( Republic of the Philippines), UNIVERSITY OF THE
PHILIPPINES, respondents.
SYLLABUS

1. CIVIL LAW; SPECIAL CONTRACTS; CONTRACT FOR PIECE

OF WORK; AS A RULE, ACCEPTANCE OF THE WORK BY
EMPLOYER RELIEVE THE CONTRACTS OF LIABILITY; CASE
AT BAR. The petitioners bolster their argument by quoting
Article 1719 of the Civil Code thus, "Acceptance of the work by
the employer relieves the contractor of liability . . ." and stopping
there. The exceptions were omitted by the petitioners for obvious
reasons. The defects complained against were hidden and the
employer was not expected to recognize them at the time the
work was accepted. Moreover, there was an express reservation
by UP of its right to hold the contractor liable for the defects
during a period of one year. The petitioners contention that the
defects were caused by force majeure or fortuitous event as a
result of the frequent brown-outs in Metro Manila is not
meritorious. The Court is not prepared to accept that the recurrent
power cut-off can be classified as force majeure or a fortuitous
event. We agree that the real cause of the problem, according to
the petitioners own subcontractor, was poor workmanship, as
discovered upon inspection of the cooling system. Among the
defects noted were improper interlocking of the entire electrical
system in all the six units; wrong specification of the time delay
relay, also in all the six units; incorrect wiring connections on the
oil pressure switches; improper setting of the Hi and Lo pressure
switches; and many missing parts like bolts and screws of panels,
and the compressor terminal insulation, and the terminal screws
of a circuit breaker. Curiously, it has not been shown that the
cooling system in buildings within the same area have been
similarly damaged by the power cut-offs. The brown-outs have
become an intolerable annoyance, but they cannot excuse all
contractual irregularities, including the petitioners shortcomings.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 103372 June 22, 1992

2. COMMERCIAL LAW; CORPORATIONS; OFFICIALS

THEREOF NOT SOLIDARILY LIABLE FOR THE ACTS
THEREOF; EXCEPTION. 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 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 corporation therefore should not be made personally
answerable for the payment of the employees backwages unless
he had acted maliciously or in bad faith in terminating the services
of the employee. The exception noted is where the official "had
acted maliciously or in bad faith," in which event he may be made
personally liable for his own act. That exception is not applicable
in the case at bar, because it has not been proved that De
Guzman acted maliciously or in bad faith when, as President of
EPG, he sought to protect its interests and resisted UPs claims.
Whatever damage was caused to UP as a result of his acts is the
sole responsibility of EPG even though De Guzman was its
principal officer and controlling stockholder.
CRUZ, J.:
Petitioner EPG Construction Co., Inc. and the University of the
Philippines, herein private respondent, entered into a contract for
the construction of the UP Law Library Building for the stipulated

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price of P7,545,000.00. The agreement included the following

provision:
ARTICLE XI
GUARANTEE
CONTRACTOR guarantees that the work
completed under the contract and any
change order, thereto, shall be in accordance
with the plans and specification prepared by
ARCHITECT, and shall conform to the
specific requirements, performances, and
capacities required by the contract, and shall
be free from imperfect workmanship or
materials. CONTRACTOR shall repair at his
own cost and expenses for a period of one
(1) year from date of substantial completion
and acceptance of the work by the OWNER,
all the work covered under the contract and
change orders that may prove defective
except
maintenance
works.
The
CONTRACTOR shall be liable in accordance
with Art. 1723 of the Civil Code in case, within
15 years from completion of the project, the
building collapses on account of defects in
the construction or the use of materials of
inferior quality furnished by him or due to any
violation of the terms of contract.
Upon its completion, the building was formally turned over by
EPG to the private respondent. UP issued a certification of
acceptance dated January 13, 1983, reading as follows:
This is to certify that the General
Construction Work of the College of Law
Library Annex Building, University of the
Philippines, Diliman, Quezon City, has been
satisfactorily completed as per plans and
specifications as of January 11, 1983 without
any defects whatsoever and therefore
accepted.
Release of the 10% retention is hereby
recommended in favor of EPG Construction,
Inc.
Sometime in July, 1983, the private respondent complained to the
petitioner that 6 air-conditioning units on the third floor of the
building were not cooling properly. After inspection of the
equipment, EPG agreed to shoulder the expenses for their repair,
including labor and materials, in the amount of P38.000.00.
For whatever reason, the repair was never undertaken. UP
repeated its complaints to EPG, which again sent its
representatives to assess the defects. Finally, it made UP a
written offer to repair the system for P194,000.00.
UP insisted that EPG was obligated to repair the defects at its
own expense under the guarantee provision in their contract. EPG
demurred. UP then contracted with another company, which
repaired the defects for P190,000.00.
The private respondent subsequently demanded from EPG
reimbursement of the said amount plus an equal sum as

liquidated damages. When the demand was rejected, UP sued

EPG and its president, Emmanuel P. de Guzman, in the Regional
Trial Court of Quezon City. De Guzman moved to dismiss the
complaint as to him for lack of a cause of action, but the motion
was denied.
After trial, judgment was rendered by Judge Antonio P. Solano
requiring both defendants jointly and severally to pay the plaintiff
P190,000.00 as actual damages, P50,000.00 as liquidated
damages, P10,000.00 as attorney's fees, and costs.
The petitioners appealed to the Court of Appeals, which sustained
the trial court. 1 They then came to this Court to fault the
respondent court for not holding that: 1) UP was estopped by its
certificate of acceptance from imputing liability to EPG for the
defects; 2) the defects were due to force majeure or fortuitous
event; and 3) Emmanuel de Guzman has a separate personality
from that of EPG Construction Co., Inc.
The petitioners argue that by issuing the certificate of acceptance,
UP waived the guarantee provision and is now estopped from
invoking it. The argument is absurd. All UP certified to was that
the building was in good condition at the time it was turned over to
it on January 13, 1983. It did not thereby relieve the petitioners of
liability for any defect that might arise or be discovered later
during the one-year period of the guarantee. Any other
interpretation would make the guarantee provision useless to
begin with as it would have automatically become functus officio
with the turn-over of the construction.
The petitioners bolster their argument by quoting Article 1719 of
the Civil Code thus, "Acceptance of the work by the employer
relieves the contractor of liability . . . " and stopping there. The
Article reads in full as follows:
Art. 1719. Acceptance of the work by the
employer relieves the contractor of liability for
any defect in the work, unless:
(1) The defect is hidden and the employer is
not, by his special knowledge, expected to
recognize the same; or
(2) The employer expressly reserves his
rights against the contractor by reason of the
defect.
The exceptions were omitted by the petitioners for obvious
reasons. The defects complained against were hidden and the
employer was not expected to recognize them at the time the
work was accepted. Moreover, there was an express reservation
by UP of its right to hold the contractor liable for the defects
during a period of one year.
The petitioners' contention that the defects were caused by force
majeure or fortuitous event as a result of the frequent brown-outs
in Metro Manila is not meritorious. The Court is not prepared to
accept that the recurrent power cut-offs can be classified as force
majeure or a fortuitous event, We agree that the real cause of the
problem, according to the petitioners' own subcontractor, was
poor workmanship, as discovered upon inspection of the cooling
system, Among the detects noted were improper interlocking of
the entire electrical system in all the six units; wrong specification
of the time delay relay, also in all the six units; incorrect wiring
connections on the oil pressure switches; improper setting of the

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Hi and Lo pressure switches; and many missing parts like bolts

and screws of panels, and the compressor terminal insulation,
and the terminal screws of a circuit breaker. 2
Curiously, it has not been shown that the cooling system in
buildings within the same area have been similarly damaged by
the power cut-offs. The brown-outs have become an intolerable
annoyance, but they cannot excuse all contractual irregularities,
including the petitioners' shortcomings.
The petitioners also claim that the breakdown of the cooling
system was caused by the failure of UP to do maintenance work
thereon. We do not see how mere maintenance work could have
corrected the above-mentioned defects. At any rate, whether the
repairs in the air-conditioning system can be considered mere
maintenance work is a factual issue. The resolution thereof by the
lower courts is binding upon this Court in the absence of a clear
showing that it comes under the accepted exceptions to the rule.
There is no such showing here.
The final point of the petition is that Emmanuel P. de Guzman has
a separate legal personality from EPG Construction Co., Inc. and
should not be held solidarity liable with it. He stresses that the
acts of the company are its own responsibility and there is no
reason why any liability arising from such acts should be ascribed
to him. Thus:

maliciously or in bad faith in terminating the

services of the employee. 4
The exception noted is where the official "had acted maliciously or
in bad faith," in which event he may be made personally liable for
his own act. That exception is not applicable in the case at bar,
because it has not been proved that De Guzman acted
maliciously or in bad faith when, as President of EPG, he sought
to protect its interests and resisted UP's claims. Whatever
damage was caused to UP as a result of his acts is the sole
responsibility of EPG even though De Guzman was its principal
officer and controlling stockholder.
In sum, we hold that the lower court did not err in holding EPG
liable for the repair of the air-conditioning system at its expense
pursuant to the guarantee provision in the construction contract
with UP. However, Emmanuel de Guzman is not solidarily liable
with it, having acted on its behalf within the scope of his authority
and without any demonstrated malice or bad faith.
WHEREFORE, the appealed decision is AFFIRMED but with the
modification that EPG Construction Co., Inc. shall be solely liable
for the damages awarded in favor of the University of the
Philippines. It is so ordered.
Grio-Aquino, Medialdea and Bellosillo, JJ., concur.

It is a doctrine well-established and obtains

both at law and in equity that a corporation is
a distinct legal entity to be considered as
separate and apart from the individual
stockholders or members who compose it,
and is not affected by the personal rights,
obligations
and
transactions
of
its
stockholders or members. 3
The trial court did not explain why Emmanuel de Guzman was
held solidarity liable with EPG Construction Co., Inc., and neither
did the respondent court when it affirmed the appealed decision,
In its Comment on the present petition, UP also did not refute the
petitioners' argument and simply passed upon it sub silentio
although the matter was squarely raised and discussed in the
petition.
Notably, when Emmanuel de Guzman moved to dismiss the
complaint as to him, UP said in its opposition to the motion that it
was suing him "in his official capacity and not in his personal
capacity." His inclusion as President of the company was
therefore superfluous, as De Guzman correctly contended,
because his acts as such were corporate acts imputable to EPG
itself as his principal. It is settled 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 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. The general manager of a
corporation therefore should not be made
personally answerable for the payment of the
employee's backwages unless he had acted

VOLENTI NON FIT INJURIA

CORPORATION LAW | 178