CASES SUMMARY (PART 3)

IV. The corporate entity

Campos, Volume I, pages 137-2394

A. Separate corporate personality

B. Disregarding the corporate entity

Sulo ng Bayan v Araneta, L-31061, 17 August 1976. 72 SCRA 347

Gallagher v Germania Brewing – see Campos, pp 131-141

Stockholders of Guanzon & Sons v RD, GR L-18216, 30 Oct 1962, 6 SCRA 373

Properties registered in the name of the corporation are owned by it as a separate entity. The
shares held by stockholders are their personal property and not the corporation.

Liquidation by stockholders after a corporation’s dissolution is not mere partitioning of community

property, but already a conveyance or transfer of title to them from the corporation. The
distribution of the corporate properties to the SHs was deemed not in the nature of a partition
among co-owners, but rather a disposition by the corporation to the SHs as opposite parties to a
contract.

Caram v CA, L-48627, 30 June 1987, 151 SCRA 373

A certain Barretto and Garcia contracted the services of respondent Arellano for his technical
services to undertake a project study for the formation of a corporation, the Filipinas Orient
Airways. The study was then presented to Caram, who wanted to invest in the corporation. The
airline was eventually organized on the basis of the project study with Caram spouses as major
stockholders, and Barretto and Garcia as corporate officers. Arellano sued for compensation due
to him for his services in undertaking the study.

Filipinas Orient is a bona fide corporation, the principal stockholders of which are the Carams. As
such, the corporation, should alone be liable for its corporate acts as duly authorized by its
officers. It has a separate juridical personality and its principal stockholders should not be liable
for the acts thereof. The Carams did not contract the services of Arellano; it was only the results
of the study made by Arellano that was presented to them to induce them to invest.

Palay Inc. v Clave, L-50076, 21 September 1983, 124 SCRA 640

Unless sufficient proof appears on record that an officer has used the corporation to defraud a
third party, he cannot be made personally liable just because he appeared to be the major
stockholder. 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.

Cruz v Dalisay, AM R-181-P, 31 July 1987, 152 SCRA 482

Indophil Textile Mill Workers v Calica, GR. 96490, 3 Feb 1992, 205 SCRA 697

The fact that the businesses of private respondent and Acrylic are related, that some of the
employees of the private respondent are the same persons manning and providing for auxiliary
services to the units of Acrylic, and that the physical plants, offices and facilities are situated in
the same compound, it is our considered opinion that these facts are not sufficient to justify the
piercing of the corporate veil of Acrylic.

Mobilia Products v Umezawa, GR 149357, March 04, 2005, 452 SCRA 736

Child Learning Center v Tagario, GR 150920, 25 Nov 2005,476 SCRA 236

Yu v. NLRC, GR 111810-11, 16 June 1995, 245 SCRA 134

TDI as a corporation or its shares of stock were not purchased by Twin Ace. The buyer limited
itself to purchasing most of the assets, equipment, and machinery of TDI. Thus, Twin Ace or
Tanduay Distillers did not take over the corporate personality of TDI although they manufacture
the same product at the same plant with the same equipment and machinery. Obviously, the trade
name "Tanduay" went with the sale because the new firm does business as Tanduay Distillers and
its main product of rum is sold as Tanduay Rum. There is no showing, however, that TDI itself was
absorbed by Twin Ace or that it ceased to exist as a separate corporation.

Laguna Transportation v SSS, GR L-14606, 28 April 1960, 107 Phil 833

US v Milwaukee Refrigerator – see Campos, pp 151-153

Marvel Building Corp v David, GR L-5081, 24 Feb 1954, 94 Phil 376

This is a case where corporate entity was used to evade war profits taxes.

Castro was the sole and exclusive owner and that the other persons name in the articles of
incorporation are mere dummies:

(1) Castro endorsed in blank the shares of stock in the name of the other incorporators and
maintained it in her possession.

(2) The dummy stockholders did not have incomes in such amounts in the certificates during the
time of the organization of the corporation or after in order to enable them to pay in full for
their subscriptions.

(3) The subscriptions were not receipted for and were deposited in the corporation name but kept
in Castro’s possession.

(4) The stockholders or directors never appeared to have met to discuss the business of the
corporation.

(5) Castro had advance large sums of money to the corporation without any accounting and that
the books were kept as if they belonged to Castro alone.

(6) The supposed subscribers did not appear in court to support their claim, nor did they present
any documentary evidence such as receipts and testify on the payments made on the subscriptions.

Palacio et al v Fely Transportation, L-15121, 31 August 1962, 5 SCRA 1011

Tan Boon Hee & Co., L-41337, 30 June 1988, 163 SCRA 205

Garett v Southern Railway – see Campos, pp 200-203

The Court finds the existence of two distinct companies. There is no evidence that Southern
dictated the management of Lenoir. In fact, Marius the manager was in full control of its
operations. He established prices, handled all negotiations in CBAs. It paid local taxes, had local
legal counsel, maintained Workmen’s Compensation.

PNB v. Ritratto Group, Inc., G.R. No. 142616, 31 July 2001, 362 SCRA 216

Jardine Davies, Inc. v JRB Realty, GR 151438, 15 July 2005, 463 SCRA 555

While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that
Aircon's corporate legal existence can just be disregarded. The Court categorically held in
another case that a subsidiary has an independent and separate juridical personality, distinct
from that of its parent company; hence, any claim or suit against the latter does not bind the
former, and vice versa. In applying the doctrine, the following requisites must be established: (1)
control, not merely majority or complete stock control; (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 acts in contravention of plaintiff's legal rights; and (3) the
aforesaid control and breach of duty must proximately cause the injury or unjust loss complained
of.

The records bear out that Aircon is a subsidiary of the petitioner only because the latter acquired
Aircon's majority of capital stock. It, however, does not exercise complete control over Aircon;
nowhere can it be gathered that the petitioner manages the business affairs of Aircon.

La Campana Coffee Factory, Inc. v Kaisahan ng mga Manggagawa, GR L-5677, 25 May 1953,
93 Phil 160

Tan Tong and family owned and controlled 2 corporations: one engaged in the sale of coffee and
the other in starch. Both corporations had one office, one management, and one payroll, and the
laborers of both corporations were interchangeable. The 60 members of the labor association in
the coffee and starch factories demanded higher wages addressed to La Campania Starch and
Coffee Factory.

The Court disregarded the fiction of corporate existence and treated the two companies as one.
In alter ego cases, no pecuniary claim need be involved to allow the courts to apply the piercing
doctrine.

Pamplona Plantation v Tinghil, GR 159121, 3 February 2005, 450 SCRA 421

Claparols v Court of Industrial Relations, L-30822, 31 July 1975, 65 SCRA 613

It is very clear that the Claparols Corp which succeeded Claparols Steel and Nail is the
continuation and successor of the first entity and its emergence was skillfully timed to avoid the
financial liability that already attached to its predecessor, Claparols Steel and Nail. Both
corporations were owned and controlled by 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 Claparols Steel was owned by Eduardo Claparols
himself, and all assets of the dissolved Claparols Steel and Nail were turned over to Claparols
Steel Corp.

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 the financial obligation to its employees. 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, will merge them
into one.

Villa Rey Transit, Inc. v Ferrer, et al., L-23893, 29 Oct 1968, 25 SCRA 849

IT would appear that Villarama supplied the organization expenses and the assets of Villa Rey
such as trucks and equipment, and that there was no actual payment by the original subscribers
of the amounts of P95K and P100K as first and second installments of the paid-up capital. The
finances of the corporation was manipulated and disbursed by Jose as they were his private funds,
in such a way that he appeared to be the actual owner-treasurer and not the wife.

Villarama made use of the money of the corporation and deposited it to his private accounts, and
the corporation paid for his expenses. He admitted that he mingled corporate with his personal
funds. All these are strong evidence that Villarama had been much too involved in the affairs of
Villa Rey and show that Villa Rey is his alter ego.

Cease et al v CA, L-33172, 18 October 1979, 93 SCRA 483

In sustaining the theory that the estate of Forrest and Tiaong Milling are merged as one
personality and that the company is only the business conduit and alter ego of Forrest, the TC
correctly ruled that the company developed into a close family corporation, with the Board and
stockholders belonging to one family, the head of which was Forrest who always retained the
majority stocks and thus control and management of its affairs.

The business of the corporation in question is largely the personal venture of Forrest. The
children were neither subscribers or purchasers of the stocks they own. Their participation as
nominal shareholders emanated solely from Forrest’s gratuitous dole out of his own shares to the
benefit of his

Delpher Traders Corp v IAC, L-69259, 26 Jan 1988, 157 SCRA 349

The DoE between Pachecos and Delpher cannot be considered a contract of sale. There was no
transfer of actual ownership. The Pacheco family merely changed their ownership from one form
to another, and it remained in the same hands. After incorporation, one becomes a stockholder by
subscription or purchasing stock directly from the corporation or from the individual owners
thereof. In this case, the Pachecos became owners of the corporation by subscription, which is
an agreement to take and pay for original unissued shares of a corporation formed or to be
formed. It is significant in this case that the Pachecos took no par value shares in exchange for
the properties. A no-par value share does not purport to represent any stated proportionate
interest in the capital stock measured by value, but only an aliquot part of the whole number of
shares of the issuing corporation.

Delpher, which makes it a business conduit of the Pachecos. What they really did was to invest
their properties and change the nature of their ownership from unincorporated to incorporated
form by organizing Delpher to take control of the properties and save on inheritance taxes. The
records do no point to anything objectionable about this estate planning scheme. The legal right
of a taxpayer to decrease the amount of what otherwise could be his taxes or avoid them cannot
be doubted. As they are still the owners, Hydro has no basis for its claim of RFR under the lease
contract.

Koppel (Phil) Inc. v Yatco, GR L-47673, 10 October 1946, 77 Phil 496

The Court said that the virtual control of the shareholdings of a corporation would lead to certain
legal conclusions. It could not overlook the fact that in the practical working of corporate
organizations of the class to which the two entities belonged, 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.

The following are facts which led to the Court to conclude the above:

— share in the profits of Koppel Phils was left to the sole, unbridled control of Koppel
Industrial
— shares of stock of Koppel Phils are all owned by Koppel Industrial (overwhelming majority)
— Koppel Phils acted as agent and representative of Koppel Industrial
— Koppel Phils alone bore the incidental expenses for transactions, such as cable expenses
— Koppel Phils was fully empowered to instruct banks it deals with, if purchasers were not
able to pay the bank drafts to the bank as payment for the purchases
— Koppel Phils makes good any deficiencies by deliveries from its own stock

The application of the piercing doctrine is not a contravention of the principle that the corporate
personality of a corporation cannot be collaterally attacked. When the piercing doctrine is applied
against a corporation in a particular case, the court does not deny legal personality… for any and
all purposes. The application of the piercing doctrine is therefore within the ambit of the principle
of res judicata that binds only the parties to the case and only to the matters actually resolved
therein.

Liddell v Collector of Internal Revenue, L-9687, 30 June 1961, 2 SCRA 632

Frank Liddell owned both corporations as his wife could not have had the money to pay her
subscriptions. Such fact alone though not sufficient to warrant piercing, but under the proven
facts alone, Liddel Motors was the medium created by Liddel & Co to reduce its tax liability.

Where a corporation is a dummy and serves no business purpose and is intended only as a blind,
the corporate fiction may be ignored.

Substantial ownership in the capital stock of a corporation entitling the SH to a significant vote
in corporate affairs allows then no standing or claims pertaining to corporate affairs. Mere
ownership by a single SH or by another corporation of all or nearly all capital stock of a corporation
is not of itself sufficient ground for disregarding the separate corporate personality.

Yutivo v Court of Tax Appeals, L-13203, 28 January 1961, 1 SCRA 160

Stone et al v Eacho – see Campos, pp 224-230

Berkey v Third Avenue – see Campos, pp 230-235

C. Entitlement of corporation to moral damages

LBC Express, Inc. v CA, G.R. No. 108670 September 21, 1994, 236 SCRA 602

A corporation, being an artificial person and having existence only in legal contemplation, has no
feeling; thus, it CANNOT experience physical suffering and mental anguish.

ABS CBN v CA, G.R. No. 128690, January 21, 1999, 361 SCRA 572

No moral damages can be granted. A corporation has no feeling, no emotions, no senses. It cannot
experience physical suffering and mental anguish, which can be experienced only by one having a
nervous system.

Filipinas Broadcasting Network v Ago Medical and Educational Center, GR 141994, 17 January
2005, 448 SCRA 413

A juridical person is generally not entitled to moral damages. An exception is when a corporation
may have a good reputation to which, if besmirched, may also be a ground for the award of moral
damages.

Therefore, a juridical person can validly complain for libel or any other form of defamation and
claim for moral damages. Where the broadcast is libellous per se, the law implies damages.

D. Entitlement to constitutional guarantees

E. Criminal liability; civil liability for tort

People v Tan Boon Kong, GR L-35262, 15 March 1930, 54 Phil 607

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. Here, false return
constitutes a violation of law, and Kong, as the author of the illegal act, must answer for its
consequences.

Espiritu v Petron, G.R. No. 170891, 24 November 2009, 625 SCRA 245

Corporate officers or employees, through whose acts, default or omission the corporation
commits a crime, may themselves be individually held answerable for the crime. In a corporation,
the management of its business is generally vested in its board of directors, NOT its
stockholders; the latter do not have a hand in running the day-to-day business operations unless
they are at the same time directors or officers of the corporation.

Before a stockholder may be held criminally liable for acts committed by the corporation, it must
be shown that he had knowledge of the criminal act committed in the name of the corporation and
that he took part in the same or gave his consent, whether by action or inaction.

People v Concepcion, GR L-19190, 29 November 1922, 54 Phil 607

When the corporation is itself forbidden to do an act, the prohibition extends to the board of
directors and to each director separately and individually.

Sia v People, GR L-30896, 28 April1983, 429 SCRA 81

Act, to be a crime, is NOT in the performance of an act directly ordained by law to be performed
by the corporation. It is imposed by agreement of parties, as a practice in the usual pursuit of a
business or a commercial transaction.
The offense may arise, if at all, from the peculiar terms and condition agreed upon by the parties
to the transaction, not by direct provision of the law. The intention of the parties is a factor
determinant of whether a crime was committed or whether a civil obligation alone intended by the
parties.

Philippine National Bank v CA, GR L-27155 18 May 1978, 83 SCRA 237

A corporation is civilly liable in the same manner as natural persons for torts because generally
speaking, the rules governing 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 an artificial person.

A corporation is liable 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.