[LIABILITY FOR TORTS]

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.

Certiorari to review the decision of the Court of Appeals which affirmed the judgment of the Court of
First Instance of Manila in Civil Case No. 34185, ordering petitioner, as third-party defendant, to pay
respondent Rita Gueco Tapnio, as third-party plaintiff, the sum of P2,379.71, plus 12% interest per annum
from September 19, 1957 until the same is fully paid, P200.00 attorney's fees and costs, the same
amounts which Rita Gueco Tapnio was ordered to pay the Philippine American General Insurance Co.,
Inc., to be paid directly to the Philippine American General Insurance Co., Inc. in full satisfaction of the
judgment rendered against Rita Gueco Tapnio in favor of the former; plus P500.00 attorney's fees for Rita
Gueco Tapnio and costs. The basic action is the complaint filed by Philamgen (Philippine American
General Insurance Co., Inc.) as surety against Rita Gueco Tapnio and Cecilio Gueco, for the recovery
of the sum of P2,379.71 paid by Philamgen to the Philippine National Bank on behalf of respondents
Tapnio and Gueco, pursuant to an indemnity agreement. Petitioner Bank was made third-party
defendant by Tapnio and Gueco on the theory that their failure to pay the debt was due to the fault or
negligence of petitioner.

The facts as found by the respondent Court of Appeals, in affirming the decision of the Court of First
Instance of Manila, are quoted hereunder:

Plaintiff executed its Bond, Exh. A, with defendant Rita Gueco Tapnio as principal, in favor of the
Philippine National Bank Branch at San Fernando, Pampanga, to guarantee the payment of defendant
Rita Gueco Tapnio's account with said Bank. In turn, to guarantee the payment of whatever amount
the bonding company would pay to the Philippine National Bank, both defendants executed the
indemnity agreement, Exh. B. Under the terms and conditions of this indemnity agreement, whatever
amount the plaintiff would pay would earn interest at the rate of 12% per annum, plus attorney's fees in
the amount of 15 % of the whole amount due in case of court litigation.

The original amount of the bond was for P4,000.00; but the amount was later reduced to P2,000.00.

It is not disputed that defendant Rita Gueco Tapnio was indebted to the bank in the sum of P2,000.00,
plus accumulated interests unpaid, which she failed to pay despite demands. The Bank wrote a letter of
demand to plaintiff, as per Exh. C; whereupon, plaintiff paid the bank on September 18, 1957, the full
amount due and owing in the sum of P2,379.91, for and on account of defendant Rita Gueco's
obligation (Exhs. D and D-1).

Plaintiff, in turn, made several demands, both verbal and written, upon defendants (Exhs. E and F), but
to no avail.

Defendant Rita Gueco Tapnio admitted all the foregoing facts. She claims, however, when demand
was made upon her by plaintiff for her to pay her debt to the Bank, that she told the Plaintiff that she
did not consider herself to be indebted to the Bank at all because she had an agreement with one
Jacobo-Nazon whereby she had leased to the latter her unused export sugar quota for the 1956-1957
agricultural year, consisting of 1,000 piculs at the rate of P2.80 per picul, or for a total of P2,800.00, which
was already in excess of her obligation guaranteed by plaintiff's bond, Exh. A. This lease agreement,
according to her, was with the knowledge of the bank. But the Bank has placed obstacles to the
consummation of the lease, and the delay caused by said obstacles forced 'Nazon to rescind the lease
contract. Thus, Rita Gueco Tapnio filed her third-party complaint against the Bank to recover from the
latter any and all sums of money which may be adjudged against her and in favor of the plaitiff plus
moral damages, attorney's fees and costs.

Insofar as the contentions of the parties herein are concerned, we quote with approval the following
findings of the lower court based on the evidence presented at the trial of the case:

It has been established during the trial that Mrs. Tapnio had an export sugar quota of 1,000 piculs for the
agricultural year 1956-1957 which she did not need. She agreed to allow Mr. Jacobo C. Tuazon to use
said quota for the consideration of P2,500.00 (Exh. "4"-Gueco). This agreement was called a contract of
lease of sugar allotment.

At the time of the agreement, Mrs. Tapnio was indebted to the Philippine National Bank at San
Fernando, Pampanga. Her indebtedness was known as a crop loan and was secured by a mortgage
on her standing crop including her sugar quota allocation for the agricultural year corresponding to
said standing crop. This arrangement was necessary in order that when Mrs. Tapnio harvests, the P.N.B.,
having a lien on the crop, may effectively enforce collection against her. Her sugar cannot be exported
without sugar quota allotment Sometimes, however, a planter harvest less sugar than her quota, so her
excess quota is utilized by another who pays her for its use. This is the arrangement entered into
between Mrs. Tapnio and Mr. Tuazon regarding the former's excess quota for 1956-1957 (Exh. "4"-
Gueco).

Since the quota was mortgaged to the P.N.B., the contract of lease had to be approved by said Bank,
The same was submitted to the branch manager at San Fernando, Pampanga. The latter required the
parties to raise the consideration of P2.80 per picul or a total of P2,800.00 (Exh. "2-Gueco") informing
them that "the minimum lease rental acceptable to the Bank, is P2.80 per picul." In a letter addressed to
the branch manager on August 10, 1956, Mr. Tuazon informed the manager that he was agreeable to
raising the consideration to P2.80 per picul. He further informed the manager that he was ready to pay
said amount as the funds were in his folder which was kept in the bank.

Explaining the meaning of Tuazon's statement as to the funds, it was stated by him that he had an
approved loan from the bank but he had not yet utilized it as he was intending to use it to pay for the
quota. Hence, when he said the amount needed to pay Mrs. Tapnio was in his folder which was in the
bank, he meant and the manager understood and knew he had an approved loan available to be
used in payment of the quota. In said Exh. "6-Gueco", Tuazon also informed the manager that he would
want for a notice from the manager as to the time when the bank needed the money so that Tuazon
could sign the corresponding promissory note.

Further Consideration of the evidence discloses that when the branch manager of the Philippine
National Bank at San Fernando recommended the approval of the contract of lease at the price of
P2.80 per picul (Exh. 1 1-Bank), whose recommendation was concurred in by the Vice-president of said
Bank, J. V. Buenaventura, the board of directors required that the amount be raised to 13.00 per picul.
This act of the board of directors was communicated to Tuazon, who in turn asked for a reconsideration
thereof. On November 19, 1956, the branch manager submitted Tuazon's request for reconsideration to
the board of directors with another recommendation for the approval of the lease at P2.80 per picul,
but the board returned the recommendation unacted upon, considering that the current price
prevailing at the time was P3.00 per picul (Exh. 9-Bank).

The parties were notified of the refusal on the part of the board of directors of the Bank to grant the
motion for reconsideration. The matter stood as it was until February 22, 1957, when Tuazon wrote a
letter (Exh. 10-Bank informing the Bank that he was no longer interested to continue the deal, referring
to the lease of sugar quota allotment in favor of defendant Rita Gueco Tapnio. The result is that the
latter lost the sum of P2,800.00 which she should have received from Tuazon and which she could have
paid the Bank to cancel off her indebtedness,

The court below held, and in this holding we concur that failure of the negotiation for the lease of the
sugar quota allocation of Rita Gueco Tapnio to Tuazon was due to the fault of the directors of the
Philippine National Bank, The refusal on the part of the bank to approve the lease at the rate of P2.80
per picul which, as stated above, would have enabled Rita Gueco Tapnio to realize the amount of
P2,800.00 which was more than sufficient to pay off her indebtedness to the Bank, and its insistence on
the rental price of P3.00 per picul thus unnecessarily increasing the value by only a difference of
P200.00. inevitably brought about the rescission of the lease contract to the damage and prejudice of
Rita Gueco Tapnio in the aforesaid sum of P2,800.00. The unreasonableness of the position adopted by
the board of directors of the Philippine National Bank in refusing to approve the lease at the rate of
P2.80 per picul and insisting on the rate of P3.00 per picul, if only to increase the retail value by only
P200.00 is shown by the fact that all the accounts of Rita Gueco Tapnio with the Bank were secured by
chattel mortgage on standing crops, assignment of leasehold rights and interests on her properties, and
surety bonds, aside from the fact that from Exh. 8-Bank, it appears that she was offering to execute a
real estate mortgage in favor of the Bank to replace the surety bond This statement is further bolstered
by the fact that Rita Gueco Tapnio apparently had the means to pay her obligation fact that she has
been granted several value of almost P80,000.00 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 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.
 [CRIMINAL LIABILITY]

G. R. No. 164317 February 6, 2006

ALFREDO CHING, Petitioner,

vs.
THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS-VILLAVERT, JUDGE EDGARDO
SUDIAM of the Regional Trial Court, Manila, Branch 52; RIZAL COMMERCIAL BANKING CORP. and THE
PEOPLE OF THE PHILIPPINES, Respondents.

Before the Court is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) in CA-
G.R. SP No. 57169 dismissing the petition for certiorari, prohibition and mandamus filed by petitioner
Alfredo Ching, and its Resolution2 dated June 28, 2004 denying the motion for reconsideration thereof.

Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). Sometime in September
to October 1980, PBMI, through petitioner, applied with the Rizal Commercial Banking Corporation
(respondent bank) for the issuance of commercial letters of credit to finance its importation of assorted
goods.3

Respondent bank approved the application, and irrevocable letters of credit were issued in favor of
petitioner. The goods were purchased and delivered in trust to PBMI. Petitioner signed 13 trust
receipts4 as surety, acknowledging delivery of the following goods:

T/R Date Granted Maturity Date Principal Description of Goods

Nos.

1845 12-05-80 03-05-81 P1,596,470.05 79.9425 M/T "SDK" Brand

Synthetic Graphite
Electrode

1853 12-08-80 03-06-81 P198,150.67 3,000 pcs. (15 bundles)

Calorized Lance Pipes

1824 11-28-80 02-26-81 P707,879.71 One Lot High Fired

Refractory Tundish Bricks

1798 11-21-80 02-19-81 P835,526.25 5 cases spare parts for

CCM

1808 11-21-80 02-19-81 P370,332.52 200 pcs. ingot moulds

2042 01-30-81 04-30-81 P469,669.29 High Fired Refractory

Nozzle Bricks

1801 11-21-80 02-19-81 P2,001,715.17 Synthetic Graphite

Electrode [with] tapered
pitch filed nipples

1857 12-09-80 03-09-81 P197,843.61 3,000 pcs. (15 bundles

calorized lance pipes [)]

1895 12-17-80 03-17-81 P67,652.04 Spare parts for

Spectrophotometer

1911 12-22-80 03-20-81 P91,497.85 50 pcs. Ingot moulds

2041 01-30-81 04-30-81 P91,456.97 50 pcs. Ingot moulds

2099 02-10-81 05-11-81 P66,162.26 8 pcs. Kubota Rolls for

rolling mills
 2100 02-10-81 05-12-81 P210,748.00 Spare parts for
Lacolaboratory
Equipment5

Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with authority to sell
but not by way of conditional sale, pledge or otherwise; and in case such goods were sold, to turn over
the proceeds thereof as soon as received, to apply against the relative acceptances and payment of
other indebtedness to respondent bank. In case the goods remained unsold within the specified period,
the goods were to be returned to respondent bank without any need of demand. Thus, said "goods,
manufactured products or proceeds thereof, whether in the form of money or bills, receivables, or
accounts separate and capable of identification" were respondent bank’s property.

When the trust receipts matured, petitioner failed to return the goods to respondent bank, or to return
their value amounting to ₱6,940,280.66 despite demands. Thus, the bank filed a criminal complaint for
estafa6 against petitioner in the Office of the City Prosecutor of Manila.

After the requisite preliminary investigation, the City Prosecutor found probable cause estafa under
Article 315, paragraph 1(b) of the Revised Penal Code, in relation to Presidential Decree (P.D.) No. 115,
otherwise known as the Trust Receipts Law. Thirteen (13) Informations were filed against the petitioner
before the Regional Trial Court (RTC) of Manila. The cases were docketed as Criminal Cases No. 86-
42169 to 86-42181, raffled to Branch 31 of said court.

Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice. The appeal was
dismissed in a Resolution7 dated March 17, 1987, and petitioner moved for its reconsideration. On
December 23, 1987, the Minister of Justice granted the motion, thus reversing the previous resolution
finding probable cause against petitioner.8 The City Prosecutor was ordered to move for the withdrawal
of the Informations.

This time, respondent bank filed a motion for reconsideration, which, however, was denied on February
24, 1988.9The RTC, for its part, granted the Motion to Quash the Informations filed by petitioner on the
ground that the material allegations therein did not amount to estafa.10

In the meantime, the Court rendered judgment in Allied Banking Corporation v. Ordoñez,11 holding that
the penal provision of P.D. No. 115 encompasses any act violative of an obligation covered by the trust
receipt; it is not limited to transactions involving goods which are to be sold (retailed), reshipped, stored
or processed as a component of a product ultimately sold. The Court also ruled that "the non-payment
of the amount covered by a trust receipt is an act violative of the obligation of the entrustee to pay." 12

On February 27, 1995, respondent bank re-filed the criminal complaint for estafa against petitioner
before the Office of the City Prosecutor of Manila. The case was docketed as I.S. No. 95B-07614.

Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that there was no
probable cause to charge petitioner with violating P.D. No. 115, as petitioner’s liability was only civil, not
criminal, having signed the trust receipts as surety.13 Respondent bank appealed the resolution to the
Department of Justice (DOJ) via petition for review, alleging that the City Prosecutor erred in ruling:

1. That there is no evidence to show that respondent participated in the misappropriation of the goods
subject of the trust receipts;

2. That the respondent is a mere surety of the trust receipts; and

3. That the liability of the respondent is only civil in nature.14

On July 13, 1999, the Secretary of Justice issued Resolution No. 250 15 granting the petition and reversing
the assailed resolution of the City Prosecutor. According to the Justice Secretary, the petitioner, as
Senior Vice-President of PBMI, executed the 13 trust receipts and as such, was the one responsible for
the offense. Thus, the execution of said receipts is enough to indict the petitioner as the official
responsible for violation of P.D. No. 115. The Justice Secretary also declared that petitioner could not
contend that P.D. No. 115 covers only goods ultimately destined for sale, as this issue had already been
settled in Allied Banking Corporation v. Ordoñez,16 where the Court ruled that P.D. No. 115 is "not limited
to transactions in goods which are to be sold (retailed), reshipped, stored or processed as a component
of a product ultimately sold but covers failure to turn over the proceeds of the sale of entrusted goods,
or to return said goods if unsold or not otherwise disposed of in accordance with the terms of the trust
receipts."

The Justice Secretary further stated that the respondent bound himself under the terms of the trust
receipts not only as a corporate official of PBMI but also as its surety; hence, he could be proceeded
against in two (2) ways: first, as surety as determined by the Supreme Court in its decision in Rizal
Commercial Banking Corporation v. Court of Appeals;17 and second, as the corporate official
responsible for the offense under P.D. No. 115, via criminal prosecution. Moreover, P.D. No. 115 explicitly
allows the prosecution of corporate officers "without prejudice to the civil liabilities arising from the
criminal offense." Thus, according to the Justice Secretary, following Rizal Commercial Banking
Corporation, the civil liability imposed is clearly separate and distinct from the criminal liability of the
accused under P.D. No. 115.

Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13 Informations
against petitioner for violation of P.D. No. 115 before the RTC of Manila. The cases were docketed as
Criminal Cases No. 99-178596 to 99-178608 and consolidated for trial before Branch 52 of said court.
Petitioner filed a motion for reconsideration, which the Secretary of Justice denied in a
Resolution18 dated January 17, 2000.

Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing the
resolutions of the Secretary of Justice on the following grounds:

1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT, ARE ACTING OPPRESSIVELY
AGAINST ALFREDO CHING WHEN THEY ALLOWED HIS PROSECUTION DESPITE THE FACT THAT NO EVIDENCE
HAD BEEN PRESENTED TO PROVE HIS PARTICIPATION IN THE ALLEGED TRANSACTIONS.

2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN GRAVE ABUSE OF DISCRETION AND IN
EXCESS OF HIS JURISDICTION WHEN THEY CONTINUED PROSECUTION OF THE PETITIONER DESPITE THE
LENGTH OF TIME INCURRED IN THE TERMINATION OF THE PRELIMINARY INVESTIGATION THAT SHOULD
JUSTIFY THE DISMISSAL OF THE INSTANT CASE.

3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY PROSECUTOR ACTED IN GRAVE ABUSE
OF DISCRETION AMOUNTING TO AN EXCESS OF JURISDICTION WHEN THEY CONTINUED THE PROSECUTION
OF THE PETITIONER DESPITE LACK OF SUFFICIENT BASIS.19

In his petition, petitioner incorporated a certification stating that "as far as this Petition is concerned, no
action or proceeding in the Supreme Court, the Court of Appeals or different divisions thereof, or any
tribunal or agency. It is finally certified that if the affiant should learn that a similar action or proceeding
has been filed or is pending before the Supreme Court, the Court of Appeals, or different divisions
thereof, of any other tribunal or agency, it hereby undertakes to notify this Honorable Court within five
(5) days from such notice."20

In its Comment on the petition, the Office of the Solicitor General alleged that -

A.

THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT PETITIONER ALFREDO CHING IS THE
OFFICER RESPONSIBLE FOR THE OFFENSE CHARGED AND THAT THE ACTS OF PETITIONER FALL WITHIN THE
AMBIT OF VIOLATION OF P.D. [No.] 115 IN RELATION TO ARTICLE 315, PAR. 1(B) OF THE REVISED PENAL
CODE.

B.

THERE IS NO MERIT IN PETITIONER’S CONTENTION THAT EXCESSIVE DELAY HAS MARRED THE CONDUCT OF
THE PRELIMINARY INVESTIGATION OF THE CASE, JUSTIFYING ITS DISMISSAL.

C.

THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND MANDAMUS IS NOT THE PROPER
MODE OF REVIEW FROM THE RESOLUTION OF THE DEPARTMENT OF JUSTICE. THE PRESENT PETITION MUST
THEREFORE BE DISMISSED.21

On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit, and on procedural
grounds. On the procedural issue, it ruled that (a) the certification of non-forum shopping executed by
petitioner and incorporated in the petition was defective for failure to comply with the first two of the
three-fold undertakings prescribed in Rule 7, Section 5 of the Revised Rules of Civil Procedure; and (b)
the petition for certiorari, prohibition and mandamus was not the proper remedy of the petitioner.

On the merits of the petition, the CA ruled that the assailed resolutions of the Secretary of Justice were
correctly issued for the following reasons: (a) petitioner, being the Senior Vice-President of PBMI and the
signatory to the trust receipts, is criminally liable for violation of P.D. No. 115; (b) the issue raised by the
petitioner, on whether he violated P.D. No. 115 by his actuations, had already been resolved and laid to
rest in Allied Bank Corporation v. Ordoñez;22 and (c) petitioner was estopped from raising the

City Prosecutor’s delay in the final disposition of the preliminary investigation because he failed to do so
in the DOJ.

Thus, petitioner filed the instant petition, alleging that:

I
THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE GROUND THAT THE
CERTIFICATION OF NON-FORUM SHOPPING INCORPORATED THEREIN WAS DEFECTIVE.

II

THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE OF DISCRETION AMOUNTING TO
LACK OR EXCESS OF JURISDICTION WAS COMMITTED BY THE SECRETARY OF JUSTICE IN COMING OUT
WITH THE ASSAILED RESOLUTIONS.23

The Court will delve into and resolve the issues seriatim.

The petitioner avers that the CA erred in dismissing his petition on a mere technicality. He claims that the
rules of procedure should be used to promote, not frustrate, substantial justice. He insists that the Rules of
Court should be construed liberally especially when, as in this case, his substantial rights are adversely
affected; hence, the deficiency in his certification of non-forum shopping should not result in the
dismissal of his petition.

The Office of the Solicitor General (OSG) takes the opposite view, and asserts that indubitably, the
certificate of non-forum shopping incorporated in the petition before the CA is defective because it
failed to disclose essential facts about pending actions concerning similar issues and parties. It asserts
that petitioner’s failure to comply with the Rules of Court is fatal to his petition. The OSG cited Section 2,
Rule 42, as well as the ruling of this Court in Melo v. Court of Appeals.24

We agree with the ruling of the CA that the certification of non-forum shopping petitioner incorporated
in his petition before the appellate court is defective. The certification reads:

It is further certified that as far as this Petition is concerned, no action or proceeding in the Supreme
Court, the Court of Appeals or different divisions thereof, or any tribunal or agency.

It is finally certified that if the affiant should learn that a similar action or proceeding has been filed or is
pending before the Supreme Court, the Court of Appeals, or different divisions thereof, of any other
tribunal or agency, it hereby undertakes to notify this Honorable Court within five (5) days from such
notice.25

Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition should be
accompanied by a sworn certification of non-forum shopping, as provided in the third paragraph of
Section 3, Rule 46 of said Rules. The latter provision reads in part:

SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. — The petition shall
contain the full names and actual addresses of all the petitioners and respondents, a concise statement
of the matters involved, the factual background of the case and the grounds relied upon for the relief
prayed for.

xxx

The petitioner shall also submit together with the petition a sworn certification that he has not
theretofore commenced any other action involving the same issues in the Supreme Court, the Court of
Appeals or different divisions thereof, or any other tribunal or agency; if there is such other action or
proceeding, he must state the status of the same; and if he should thereafter learn that a similar action
or proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different
divisions thereof, or any other tribunal or agency, he undertakes to promptly inform the aforesaid courts
and other tribunal or agency thereof within five (5) days therefrom. xxx

Compliance with the certification against forum shopping is separate from and independent of the
avoidance of forum shopping itself. The requirement is mandatory. The failure of the petitioner to
comply with the foregoing requirement shall be sufficient ground for the dismissal of the petition without
prejudice, unless otherwise provided.26

Indubitably, the first paragraph of petitioner’s certification is incomplete and unintelligible. Petitioner
failed to certify that he "had not heretofore commenced any other action involving the same issues in
the Supreme Court, the Court of Appeals or the different divisions thereof or any other tribunal or
agency" as required by paragraph 4, Section 3, Rule 46 of the Revised Rules of Court.

We agree with petitioner’s contention that the certification is designed to promote and facilitate the
orderly administration of justice, and therefore, should not be interpreted with absolute literalness. In his
works on the Revised Rules of Civil Procedure, former Supreme Court Justice Florenz Regalado states
that, with respect to the contents of the certification which the pleader may prepare, the rule of
substantial compliance may be availed of.27However, there must be a special circumstance or
compelling reason which makes the strict application of the requirement clearly unjustified. The instant
petition has not alleged any such extraneous circumstance. Moreover, as worded, the certification
cannot even be regarded as substantial compliance with the procedural requirement. Thus, the CA
was not informed whether, aside from the petition before it, petitioner had commenced any other
action involving the same issues in other tribunals.
On the merits of the petition, the CA ruled that the petitioner failed to establish that the Secretary of
Justice committed grave abuse of discretion in finding probable cause against the petitioner for
violation of estafa under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to P.D. No.
115. Thus, the appellate court ratiocinated:

Be that as it may, even on the merits, the arguments advanced in support of the petition are not
persuasive enough to justify the desired conclusion that respondent Secretary of Justice gravely abused
its discretion in coming out with his assailed Resolutions. Petitioner posits that, except for his being the
Senior Vice-President of the PBMI, there is no iota of evidence that he was a participes crimines in
violating the trust receipts sued upon; and that his liability, if at all, is purely civil because he signed the
said trust receipts merely as a xxx surety and not as the entrustee. These assertions are, however, too dull
that they cannot even just dent the findings of the respondent Secretary, viz:

"x x x it is apropos to quote section 13 of PD 115 which states in part, viz:

‘xxx If the violation or offense is committed by a corporation, partnership, association or other judicial
entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees
or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.’

"There is no dispute that it was the respondent, who as senior vice-president of PBM, executed the
thirteen (13) trust receipts. As such, the law points to him as the official responsible for the offense. Since
a corporation cannot be proceeded against criminally because it cannot commit crime in which
personal violence or malicious intent is required, criminal action is limited to the corporate agents guilty
of an act amounting to a crime and never against the corporation itself (West Coast Life Ins. Co. vs.
Hurd, 27 Phil. 401; Times, [I]nc. v. Reyes, 39 SCRA 303). Thus, the execution by respondent of said receipts
is enough to indict him as the official responsible for violation of PD 115.

"Parenthetically, respondent is estopped to still contend that PD 115 covers only goods which are
ultimately destined for sale and not goods, like those imported by PBM, for use in manufacture. This issue
has already been settled in the Allied Banking Corporation case, supra, where he was also a party,
when the Supreme Court ruled that PD 115 is ‘not limited to transactions in goods which are to be sold
(retailed), reshipped, stored or processed as a component or a product ultimately sold’ but ‘covers
failure to turn over the proceeds of the sale of entrusted goods, or to return said goods if unsold or
disposed of in accordance with the terms of the trust receipts.’

"In regard to the other assigned errors, we note that the respondent bound himself under the terms of
the trust receipts not only as a corporate official of PBM but also as its surety. It is evident that these are
two (2) capacities which do not exclude the other. Logically, he can be proceeded against in two (2)
ways: first, as surety as determined by the Supreme Court in its decision in RCBC vs. Court of Appeals,
178 SCRA 739; and, secondly, as the corporate official responsible for the offense under PD 115, the
present case is an appropriate remedy under our penal law.

"Moreover, PD 115 explicitly allows the prosecution of corporate officers ‘without prejudice to the civil
liabilities arising from the criminal offense’ thus, the civil liability imposed on respondent in RCBC vs. Court
of Appeals case is clearly separate and distinct from his criminal liability under PD 115.’" 28

Petitioner asserts that the appellate court’s ruling is erroneous because (a) the transaction between
PBMI and respondent bank is not a trust receipt transaction; (b) he entered into the transaction and was
sued in his capacity as PBMI Senior Vice-President; (c) he never received the goods as an entrustee for
PBMI, hence, could not have committed any dishonesty or abused the confidence of respondent bank;
and (d) PBMI acquired the goods and used the same in operating its machineries and equipment and
not for resale.

The OSG, for its part, submits a contrary view, to wit:

34. Petitioner further claims that he is not a person responsible for the offense allegedly because "[b]eing
charged as the Senior Vice-President of Philippine Blooming Mills (PBM), petitioner cannot be held
criminally liable as the transactions sued upon were clearly entered into in his capacity as an officer of
the corporation" and that [h]e never received the goods as an entrustee for PBM as he never had or
took possession of the goods nor did he commit dishonesty nor "abuse of confidence in transacting with
RCBC." Such argument is bereft of merit.

35. Petitioner’s being a Senior Vice-President of the Philippine Blooming Mills does not exculpate him
from any liability. Petitioner’s responsibility as the corporate official of PBM who received the goods in
trust is premised on Section 13 of P.D. No. 115, which provides:

Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the
goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were
not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of
estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act
Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised
Penal Code. If the violation or offense is committed by a corporation, partnership, association or other
juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense, without prejudice to the civil
liabilities arising from the criminal offense. (Emphasis supplied)

36. Petitioner having participated in the negotiations for the trust receipts and having received the
goods for PBM, it was inevitable that the petitioner is the proper corporate officer to be proceeded
against by virtue of the PBM’s violation of P.D. No. 115.29

The ruling of the CA is correct.

In Mendoza-Arce v. Office of the Ombudsman (Visayas),30 this Court held that the acts of a quasi-
judicial officer may be assailed by the aggrieved party via a petition for certiorari and enjoined (a)
when necessary to afford adequate protection to the constitutional rights of the accused; (b) when
necessary for the orderly administration of justice; (c) when the acts of the officer are without or in
excess of authority; (d) where the charges are manifestly false and motivated by the lust for
vengeance; and (e) when there is clearly no prima facie case against the accused. 31 The Court also
declared that, if the officer conducting a preliminary investigation (in that case, the Office of the
Ombudsman) acts without or in excess of his authority and resolves to file an Information despite the
absence of probable cause, such act may be nullified by a writ of certiorari.32

Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure, 33 the Information shall be
prepared by the Investigating Prosecutor against the respondent only if he or she finds probable cause
to hold such respondent for trial. The Investigating Prosecutor acts without or in excess of his authority
under the Rule if the Information is filed against the respondent despite absence of evidence showing
probable cause therefor.34 If the Secretary of Justice reverses the Resolution of the Investigating
Prosecutor who found no probable cause to hold the respondent for trial, and orders such prosecutor to
file the Information despite the absence of probable cause, the Secretary of Justice acts contrary to
law, without authority and/or in excess of authority. Such resolution may likewise be nullified in a petition
for certiorari under Rule 65 of the Revised Rules of Civil Procedure.35

A preliminary investigation, designed to secure the respondent against hasty, malicious and oppressive
prosecution, is an inquiry to determine whether (a) a crime has been committed; and (b) whether there
is probable cause to believe that the accused is guilty thereof. It is a means of discovering the person or
persons who may be reasonably charged with a crime. Probable cause need not be based on clear
and convincing evidence of guilt, as the investigating officer acts upon probable cause of reasonable
belief. Probable cause implies probability of guilt and requires more than bare suspicion but less than
evidence which would justify a conviction. A finding of probable cause needs only to rest on evidence
showing that more likely than not, a crime has been committed by the suspect.36

However, while probable cause should be determined in a summary manner, there is a need to
examine the evidence with care to prevent material damage to a potential accused’s constitutional
right to liberty and the guarantees of freedom and fair play37 and to protect the State from the burden
of unnecessary expenses in prosecuting alleged offenses and holding trials arising from false, fraudulent
or groundless charges.38

In this case, petitioner failed to establish that the Secretary of Justice committed grave abuse of
discretion in issuing the assailed resolutions. Indeed, he acted in accord with law and the evidence.

Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:

Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of
this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and
another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds
absolute title or security interests over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latter’s execution and delivery to the entruster of a
signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated
goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents
or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms
and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the
following:

1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or
process the goods with the purpose of ultimate sale; Provided, That, in the case of goods delivered
under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster
shall retain its title over the goods whether in its original or processed form until the entrustee has
complied fully with his obligation under the trust receipt; or (c) to load, unload, ship or otherwise deal
with them in a manner preliminary or necessary to their sale; or
2. In the case of instruments a) to sell or procure their sale or exchange; or b) to deliver them to a
principal; or c) to effect the consummation of some transactions involving delivery to a depository or
register; or d) to effect their presentation, collection or renewal.

The sale of goods, documents or instruments by a person in the business of selling goods, documents or
instruments for profit who, at the outset of the transaction, has, as against the buyer, general property
rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining
title or other interest as security for the payment of the purchase price, does not constitute a trust
receipt transaction and is outside the purview and coverage of this Decree.

An entrustee is one having or taking possession of goods, documents or instruments under a trust receipt
transaction, and any successor in interest of such person for the purpose of payment specified in the
trust receipt agreement.39 The entrustee is obliged to: (1) hold the goods, documents or instruments in
trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of
the trust receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the
entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure
the goods for their total value against loss from fire, theft, pilferage or other casualties; (4) keep said
goods or proceeds thereof whether in money or whatever form, separate and capable of identification
as property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or
upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not
contrary to the provisions of the decree.40

The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments
released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as
appears in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale,
and to the enforcement of all other rights conferred on him in the trust receipt; provided, such are not
contrary to the provisions of the document.41

In the case at bar, the transaction between petitioner and respondent bank falls under the trust receipt
transactions envisaged in P.D. No. 115. Respondent bank imported the goods and entrusted the same
to PBMI under the trust receipts signed by petitioner, as entrustee, with the bank as entruster. The
agreement was as follows:

And in consideration thereof, I/we hereby agree to hold said goods in trust for the said BANK as its
property with liberty to sell the same within ____days from the date of the execution of this Trust Receipt
and for the Bank’s account, but without authority to make any other disposition whatsoever of the said
goods or any part thereof (or the proceeds) either by way of conditional sale, pledge or otherwise.

I/we agree to keep the said goods insured to their full value against loss from fire, theft, pilferage or
other casualties as directed by the BANK, the sum insured to be payable in case of loss to the BANK,
with the understanding that the BANK is, not to be chargeable with the storage premium or insurance or
any other expenses incurred on said goods.

In case of sale, I/we further agree to turn over the proceeds thereof as soon as received to the BANK, to
apply against the relative acceptances (as described above) and for the payment of any other
indebtedness of mine/ours to the BANK. In case of non-sale within the period specified herein, I/we
agree to return the goods under this Trust Receipt to the BANK without any need of demand.

I/we agree to keep the said goods, manufactured products or proceeds thereof, whether in the form of
money or bills, receivables, or accounts separate and capable of identification as property of the
BANK.42

It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a matter of public
policy, the failure of person to turn over the proceeds of the sale of the goods covered by a trust
receipt or to return said goods, if not sold, is a public nuisance to be abated by the imposition of penal
sanctions.43

The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions involving goods
procured as a component of a product ultimately sold has been resolved in the affirmative in Allied
Banking Corporation v. Ordoñez.44 The law applies to goods used by the entrustee in the operation of its
machineries and equipment. The non-payment of the amount covered by the trust receipts or the non-
return of the goods covered by the receipts, if not sold or otherwise not disposed of, violate the
entrustee’s obligation to pay the amount or to return the goods to the entruster.

In Colinares v. Court of Appeals,45 the Court declared that there are two possible situations in a trust
receipt transaction. The first is covered by the provision which refers to money received under the
obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The second
is covered by the provision which refers to merchandise received under the obligation to return it
(devolvera) to the owner.46 Thus, failure of the entrustee to turn over the proceeds of the sale of the
goods covered by the trust receipts to the entruster or to return said goods if they were not disposed of
in accordance with the terms of the trust receipt is a crime under P.D. No. 115, without need of proving
intent to defraud. The law punishes dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of the entruster, regardless of whether the latter is the owner or not. A mere
failure to deliver the proceeds of the sale of the goods, if not sold, constitutes a criminal offense that
causes prejudice, not only to another, but more to the public interest.47

The Court rules that although petitioner signed the trust receipts merely as Senior Vice-President of PBMI
and had no physical possession of the goods, he cannot avoid prosecution for violation of P.D. No. 115.

The penalty clause of the law, Section 13 of P.D. No. 115 reads:

Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the
goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were
not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of
estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act
Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised
Penal Code.1âwphi1 If the violation or offense is committed by a corporation, partnership, association
or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors,
officers, employees or other officials or persons therein responsible for the offense, without prejudice to
the civil liabilities arising from the criminal offense.

The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under paragraph 1(b),
Article 315 of the Revised Penal Code, or estafa with abuse of confidence. It may be committed by a
corporation or other juridical entity or by natural persons. However, the penalty for the crime is
imprisonment for the periods provided in said Article 315, which reads:

ARTICLE 315. Swindling (estafa). – Any person who shall defraud another by any of the means
mentioned hereinbelow shall be punished by:

1st. The penalty of prision correccional in its maximum period to prision mayor in its minimum period, if
the amount of the fraud is over 12,000 pesos but does not exceed 22,000 pesos; and if such amount
exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its maximum period,
adding one year for each additional 10,000 pesos; but the total penalty which may be imposed shall
not exceed twenty years. In such cases, and in connection with the accessory penalties which may be
imposed and for the purpose of the other provisions of this Code, the penalty shall be termed prision
mayor or reclusion temporal, as the case may be;

2nd. The penalty of prision correccional in its minimum and medium periods, if the amount of the fraud is
over 6,000 pesos but does not exceed 12,000 pesos;

3rd. The penalty of arresto mayor in its maximum period to prision correccional in its minimum period, if
such amount is over 200 pesos but does not exceed 6,000 pesos; and

4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed 200 pesos,
provided that in the four cases mentioned, the fraud be committed by any of the following means; xxx

Though the entrustee is a corporation, nevertheless, the law specifically makes the officers, employees
or other officers or persons responsible for the offense, without prejudice to the civil liabilities of such
corporation and/or board of directors, officers, or other officials or employees responsible for the
offense. The rationale is that such officers or employees are vested with the authority and responsibility
to devise means necessary to ensure compliance with the law and, if they fail to do so, are held
criminally accountable; thus, they have a responsible share in the violations of the law.48

If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or
other officers thereof responsible for the offense shall be charged and penalized for the crime, precisely
because of the nature of the crime and the penalty therefor. A corporation cannot be arrested and
imprisoned; hence, cannot be penalized for a crime punishable by imprisonment. 49 However, a
corporation may be charged and prosecuted for a crime if the imposable penalty is fine. Even if the
statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted and, if
found guilty, may be fined.50

A crime is the doing of that which the penal code forbids to be done, or omitting to do what it
commands. A necessary part of the definition of every crime is the designation of the author of the
crime upon whom the penalty is to be inflicted. When a criminal statute designates an act of a
corporation or a crime and prescribes punishment therefor, it creates a criminal offense which,
otherwise, would not exist and such can be committed only by the corporation. But when a penal
statute does not expressly apply to corporations, it does not create an offense for which a corporation
may be punished. On the other hand, if the State, by statute, defines a crime that may be committed
by a corporation but prescribes the penalty therefor to be suffered by the officers, directors, or
employees of such corporation or other persons responsible for the offense, only such individuals will
suffer such penalty.51Corporate officers or employees, through whose act, default or omission the
corporation commits a crime, are themselves individually guilty of the crime.52
The principle applies whether or not the crime requires the consciousness of wrongdoing. It applies to
those corporate agents who themselves commit the crime and to those, who, by virtue of their
managerial positions or other similar relation to the corporation, could be deemed responsible for its
commission, if by virtue of their relationship to the corporation, they had the power to prevent the
act.53 Moreover, all parties active in promoting a crime, whether agents or not, are principals. 54 Whether
such officers or employees are benefited by their delictual acts is not a touchstone of their criminal
liability. Benefit is not an operative fact.

In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the cloak of the
separate corporate personality of PBMI. In the words of Chief Justice Earl Warren, a corporate officer
cannot protect himself behind a corporation where he is the actual, present and efficient actor. 55

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the petitioner.

SO ORDERED.
G.R. No. 114286 April 19, 2001

THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK), petitioner, vs. THE COURT OF APPEALS,
CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM and SPOUSE, respondents.

The instant petition for review seeks to partially set aside the July 26, 1993 Decision [1] of respondent Court
of Appeals in CA-G.R. CV No. 29950, insofar as it orders petitioner to reimburse respondent Continental
Cement Corporation the amount of P490,228.90 with interest thereon at the legal rate from July 26, 1988
until fully paid. The petition also seeks to set aside the March 8, 1994 Resolution [2] of respondent Court of
Appeals denying its Motion for Reconsideration.

The facts are as follows:

On July 13, 1982, respondents Continental Cement Corporation (hereinafter, respondent Corporation)
and Gregory T. Lim (hereinafter, respondent Lim) obtained from petitioner Consolidated Bank and Trust
Corporation Letter of Credit No. DOM-23277 in the amount of P1,068,150.00 On the same date,
respondent Corporation paid a marginal deposit of P320,445.00 to petitioner. The letter of credit was
used to purchase around five hundred thousand liters of bunker fuel oil from Petrophil Corporation,
which the latter delivered directly to respondent Corporation in its Bulacan plant. In relation to the same
transaction, a trust receipt for the amount of P1,001,520.93 was executed by respondent Corporation,
with respondent Lim as signatory.

Claiming that respondents failed to turn over the goods covered by the trust receipt or the proceeds
thereof, petitioner filed a complaint for sum of money with application for preliminary
attachment[3] before the Regional Trial Court of Manila. In answer to the complaint, respondents
averred that the transaction between them was a simple loan and not a trust receipt transaction, and
that the amount claimed by petitioner did not take into account payments already made by
them.Respondent Lim also denied any personal liability in the subject transactions. In a Supplemental
Answer, respondents prayed for reimbursement of alleged overpayment to petitioner of the amount of
P490,228.90.

At the pre-trial conference, the parties agreed on the following issues:

1) Whether or not the transaction involved is a loan transaction or a trust receipt transaction;

2) Whether or not the interest rates charged against the defendants by the plaintiff are proper under
the letter of credit, trust receipt and under existing rules or regulations of the Central Bank;

3) Whether or not the plaintiff properly applied the previous payment of P300,456.27 by the defendant
corporation on July 13, 1982 as payment for the latters account; and

4) Whether or not the defendants are personally liable under the transaction sued for in this case.[4]

On September 17, 1990, the trial court rendered its Decision,[5] dismissing the Complaint and ordering
petitioner to pay respondents the following amounts under their counterclaim:P490,228.90 representing
overpayment of respondent Corporation, with interest thereon at the legal rate from July 26, 1988 until
fully paid; P10,000.00 as attorneys fees; and costs.

Both parties appealed to the Court of Appeals, which partially modified the Decision by deleting the
award of attorneys fees in favor of respondents and, instead, ordering respondent Corporation to pay
petitioner P37,469.22 as and for attorneys fees and litigation expenses.

Hence, the instant petition raising the following issues:

1. WHETHER OR NOT THE RESPONDENT APPELLATE COURT ACTED INCORRECTLY OR COMMITTED

REVERSIBLE ERROR IN HOLDING THAT THERE WAS OVERPAYMENT BY PRIVATE RESPONDENTS TO THE
PETITIONER IN THE AMOUNT OF P490,228.90 DESPITE THE ABSENCE OF ANY COMPUTATION MADE IN THE
DECISION AND THE ERRONEOUS APPLICATION OF PAYMENTS WHICH IS IN VIOLATION OF THE NEW CIVIL
CODE.

2. WHETHER OR NOT THE MANNER OF COMPUTATION OF THE MARGINAL DEPOSIT BY THE RESPONDENT
APPELLATE COURT IS IN ACCORDANCE WITH BANKING PRACTICE.

3. WHETHER OR NOT THE AGREEMENT AMONG THE PARTIES AS TO THE FLOATING OF INTEREST RATE IS
VALID UNDER APPLICABLE JURISPRUDENCE AND THE RULES AND REGULATIONS OF THE CENTRAL BANK.

4. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN NOT CONSIDERING THE
TRANSACTION AT BAR AS A TRUST RECEIPT TRANSACTION ON THE BASIS OF THE JUDICIAL ADMISSIONS OF
THE PRIVATE RESPONDENTS AND FOR WHICH RESPONDENTS ARE LIABLE THEREFOR.

5. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN NOT HOLDING PRIVATE
RESPONDENT SPOUSES LIABLE UNDER THE TRUST RECEIPT TRANSACTION.[6]
The petition must be denied.

On the first issue respecting the fact of overpayment found by both the lower court and respondent
Court of Appeals, we stress the time-honored rule that findings of fact by the Court of Appeals
especially if they affirm factual findings of the trial court will not be disturbed by this Court, unless these
findings are not supported by evidence.[7]

Petitioner decries the lack of computation by the lower court as basis for its ruling that there was an
overpayment made. While such a computation may not have appeared in the Decision itself, we note
that the trial courts finding of overpayment is supported by evidence presented before it. At any rate,
we painstakingly reviewed and computed the payments together with the interest and penalty
charges due thereon and found that the amount of overpayment made by respondent Bank to
petitioner, i.e., P563,070.13, was more than what was ordered reimbursed by the lower court.However,
since respondents did not file an appeal in this case, the amount ordered reimbursed by the lower court
should stand.

Moreover, petitioners contention that the marginal deposit made by respondent Corporation should
not be deducted outright from the amount of the letter of credit is untenable. Petitioner argues that the
marginal deposit should be considered only after computing the principal plus accrued interests and
other charges. However, to sustain petitioner on this score would be to countenance a clear case of
unjust enrichment, for while a marginal deposit earns no interest in favor of the debtor-depositor, the
bank is not only able to use the same for its own purposes, interest-free, but is also able to earn interest
on the money loaned to respondent Corporation.Indeed, it would be onerous to compute interest and
other charges on the face value of the letter of credit which the petitioner issued, without first crediting
or setting off the marginal deposit which the respondent Corporation paid to it. Compensation is proper
and should take effect by operation of law because the requisites in Article 1279 of the Civil Code are
present and should extinguish both debts to the concurrent amount.[8]

Hence, the interests and other charges on the subject letter of credit should be computed only on the
balance of P681,075.93, which was the portion actually loaned by the bank to respondent Corporation.

Neither do we find error when the lower court and the Court of Appeals set aside as invalid the floating
rate of interest exhorted by petitioner to be applicable. The pertinent provision in the trust receipt
agreement of the parties fixing the interest rate states:

I, WE jointly and severally agree to any increase or decrease in the interest rate which may occur after
July 1, 1981, when the Central Bank floated the interest rate, and to pay additionally the penalty of 1%
per month until the amount/s or installment/s due and unpaid under the trust receipt on the reverse side
hereof is/are fully paid.[9]

We agree with respondent Court of Appeals that the foregoing stipulation is invalid, there being no
reference rate set either by it or by the Central Bank, leaving the determination thereof at the sole will
and control of petitioner.

While it may be acceptable, for practical reasons given the fluctuating economic conditions, for banks
to stipulate that interest rates on a loan not be fixed and instead be made dependent upon prevailing
market conditions, there should always be a reference rate upon which to peg such variable interest
rates. An example of such a valid variable interest rate was found in Polotan, Sr. v. Court of
Appeals.[10] In that case, the contractual provision stating that if there occurs any change in the
prevailing market rates, the new interest rate shall be the guiding rate in computing the interest due on
the outstanding obligation without need of serving notice to the Cardholder other than the required
posting on the monthly statement served to the Cardholder [11] was considered valid. The aforequoted
provision was upheld notwithstanding that it may partake of the nature of an escalation clause,
because at the same time it provides for the decrease in the interest rate in case the prevailing market
rates dictate its reduction. In other words, unlike the stipulation subject of the instant case, the interest
rate involved in the Polotan case is designed to be based on the prevailing market rate. On the other
hand, a stipulation ostensibly signifying an agreement to any increase or decrease in the interest rate,
without more, cannot be accepted by this Court as valid for it leaves solely to the creditor the
determination of what interest rate to charge against an outstanding loan.

Petitioner has also failed to convince us that its transaction with respondent Corporation is really a trust
receipt transaction instead of merely a simple loan, as found by the lower court and the Court of
Appeals.

The recent case of Colinares v. Court of Appeals[12] appears to be foursquare with the facts obtaining in
the case at bar. There, we found that inasmuch as the debtor received the goods subject of the trust
receipt before the trust receipt itself was entered into, the transaction in question was a simple loan and
not a trust receipt agreement. Prior to the date of execution of the trust receipt, ownership over the
goods was already transferred to the debtor. This situation is inconsistent with what normally obtains in a
pure trust receipt transaction, wherein the goods belong in ownership to the bank and are only
released to the importer in trust after the loan is granted.
In the case at bar, as in Colinares, the delivery to respondent Corporation of the goods subject of the
trust receipt occurred long before the trust receipt itself was executed. More specifically, delivery of the
bunker fuel oil to respondent Corporations Bulacan plant commenced on July 7, 1982 and was
completed by July 19, 1982.[13] Further, the oil was used up by respondent Corporation in its normal
operations by August, 1982.[14] On the other hand, the subject trust receipt was only executed nearly
two months after full delivery of the oil was made to respondent Corporation, or on September 2, 1982.

The danger in characterizing a simple loan as a trust receipt transaction was explained in Colinares, to
wit:

The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty
and abuse of confidence in the handling of money or goods to the prejudice of another regardless of
whether the latter is the owner. Here, it is crystal clear that on the part of Petitioners there was neither
dishonesty nor abuse of confidence in the handling of money to the prejudice of PBC. Petitioners
continually endeavored to meet their obligations, as shown by several receipts issued by PBC
acknowledging payment of the loan.

The Information charges Petitioners with intent to defraud and misappropriating the money for their
personal use. The mala prohibita nature of the alleged offense notwithstanding, intent as a state of
mind was not proved to be present in Petitioners situation. Petitioners employed no artifice in dealing
with PBC and never did they evade payment of their obligation nor attempt to abscond. Instead,
Petitioners sought favorable terms precisely to meet their obligation.

Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale, contrary to
the express provision embodied in the trust receipt. They are contractors who obtained the fungible
goods for their construction project. At no time did title over the construction materials pass to the bank,
but directly to the Petitioners from CM Builders Centre. This impresses upon the trust receipt in question
vagueness and ambiguity, which should not be the basis for criminal prosecution in the event of
violation of its provisions.

The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place
them under the threats of criminal prosecution should they be unable to pay it may be unjust and
inequitable, if not reprehensible. Such agreements are contracts of adhesion which borrowers have no
option but to sign lest their loan be disapproved. The resort to this scheme leaves poor and hapless
borrowers at the mercy of banks, and is prone to misinterpretation, as had happened in this
case. Eventually, PBC showed its true colors and admitted that it was only after collection of the money,
as manifested by its Affidavit of Desistance.

Similarly, respondent Corporation cannot be said to have been dishonest in its dealings with
petitioner. Neither has it been shown that it has evaded payment of its obligations. Indeed, it continually
endeavored to meet the same, as shown by the various receipts issued by petitioner acknowledging
payment on the loan. Certainly, the payment of the sum of P1,832,158.38 on a loan with a principal
amount of only P681,075.93 negates any badge of dishonesty, abuse of confidence or mishandling of
funds on the part of respondent Corporation, which are the gravamen of a trust receipt
violation. Furthermore, respondent Corporation is not an importer which acquired the bunker fuel oil for
re-sale; it needed the oil for its own operations. More importantly, at no time did title over the oil pass to
petitioner, but directly to respondent Corporation to which the oil was directly delivered long before the
trust receipt was executed. The fact that ownership of the oil belonged to respondent Corporation,
through its President, Gregory Lim, was acknowledged by petitioners own account officer on the witness
stand, to wit:

Q - After the bank opened a letter of credit in favor of Petrophil Corp. for the account of the
defendants thereby paying the value of the bunker fuel oil what transpired next after that?

A - Upon purchase of the bunker fuel oil and upon the requests of the defendant possession of the
bunker fuel oil were transferred to them.

Q - You mentioned them to whom are you referring to?

A - To the Continental Cement Corp. upon the execution of the trust receipt acknowledging the
ownership of the bunker fuel oil this should be acceptable for whatever disposition he may make.

Q - You mentioned about acknowledging ownership of the bunker fuel oil to whom by whom?

A - By the Continental Cement Corp.

Q - So by your statement who really owns the bunker fuel oil?

ATTY. RACHON:

Objection already answered.

COURT:
Give time to the other counsel to object.

ATTY. RACHON:

He has testified that ownership was acknowledged in favor of Continental Cement Corp. so that
question has already been answered.

ATTY. BAAGA:

That is why I made a follow up question asking ownership of the bunker fuel oil.

COURT:

Proceed.

ATTY. BAAGA:

Q - Who owns the bunker fuel oil after purchase from Petrophil Corp.?

A - Gregory Lim.[15]

By all indications, then, it is apparent that there was really no trust receipt transaction that took
place. Evidently, respondent Corporation was required to sign the trust receipt simply to facilitate
collection by petitioner of the loan it had extended to the former.

Finally, we are not convinced that respondent Gregory T. Lim and his spouse should be personally liable
under the subject trust receipt. Petitioners argument that respondent Corporation and respondent Lim
and his spouse are one and the same cannot be sustained. The transactions sued upon were clearly
entered into by respondent Lim in his capacity as Executive Vice President of respondent
Corporation. We stress the hornbook law that corporate personality is a shield against personal liability
of its officers. Thus, we agree that respondents Gregory T. Lim and his spouse cannot be made
personally liable since respondent Lim entered into and signed the contract clearly in his official
capacity as Executive Vice President. The personality of the corporation is separate and distinct from
the persons composing it.[16]

WHEREFORE, in view of all the foregoing, the instant Petition for Review is DENIED. The Decision of the
Court of Appeals dated July 26, 1993 in CA-G.R. CV No. 29950 is AFFIRMED.

SO ORDERED.
 [CORPORATE ENTITY COMPARED WITH OTHER BUSINESS ENDEAVORS]

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO),
CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,

vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER MACHINERY and HEAVY
EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES and CONSTANCIO
MAGLANA, respondents.

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV
No. 66195 which modified the decision of the then Court of First Instance of Manila in Civil Case No.
66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants (respondents in G.R.
No. 84197) was dismissed but in all other respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to pay plaintiff the
amount of P311,056.02, with interest at the rate of 12% per annum compounded monthly; plus 15% of
the amount awarded to plaintiff as attorney's fees from July 2,1966, until full payment is made; plus
P70,000.00 moral and exemplary damages.

It is found in the records that the cross party plaintiffs incurred additional miscellaneous expenses aside
from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim is further required to pay cross
party plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half, the amount of
Pl84,878.74 with interest from the filing of the cross-complaints until the amount is fully paid; plus moral
and exemplary damages in the amount of P184,878.84 with interest from the filing of the cross-
complaints until the amount is fully paid; plus moral and exemplary damages in the amount of
P50,000.00 for each of the two Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and another
P20,000.00 to Constancio B. Maglana as attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants Bormaheco, the
Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is required to indemnify the
defendants Bormaheco and the Cervanteses the amount of P20,000.00 as attorney's fees and the
amount of P4,379.21, per year from 1966 with legal rate of interest up to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00 as
attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action was filed in good faith. The
fact that the properties of the Bormaheco and the Cervanteses were attached and that they were
required to file a counterbond in order to dissolve the attachment, is not an act of bad faith. When a
man tries to protect his rights, he should not be saddled with moral or exemplary damages. Furthermore,
the rights exercised were provided for in the Rules of Court, and it was the court that ordered it, in the
exercise of its discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-party defendant, for it only
secured the attachment prayed for by the plaintiff Pioneer. If an insurance company would be liable for
damages in performing an act which is clearly within its power and which is the reason for its being,
then nobody would engage in the insurance business. No further claim or counter-claim for or against
anybody is declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-
operator of Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a
sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of
necessary spare parts for the total agreed price of US $109,000.00 to be paid in installments. One DC-3
Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in
Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as
surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal,
Lim, for the balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and
Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions)
contributed some funds used in the purchase of the above aircrafts and spare parts. The funds were
supposed to be their contributions to a new corporation proposed by Lim to expand his airline business.
They executed two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one
signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The
indemnity agreements stipulated that the indemnitors principally agree and bind themselves jointly and
severally to indemnify and hold and save harmless Pioneer from and against any/all damages, losses,
costs, damages, taxes, penalties, charges and expenses of whatever kind and nature which Pioneer
may incur in consequence of having become surety upon the bond/note and to pay, reimburse and
make good to Pioneer, its successors and assigns, all sums and amounts of money which it or its
representatives should or may pay or cause to be paid or become liable to pay on them of whatever
kind and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as
deed of chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated
therein that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was duly
registered with the Office of the Register of Deeds of the City of Manila and with the Civil Aeronautics
Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No.
776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request payments from the
surety. Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the
Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that
they are co-owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of
preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that
they were not privies to the contracts signed by Lim and, by way of counterclaim, sought for damages
for being exposed to litigation and for recovery of the sums of money they advanced to Lim for the
purchase of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed
Pioneer's complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint
against all the defendants was dismissed. In all other respects the trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE APPEAL OF PETITIONER ON
THE SOLE GROUND THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF THE REINSURANCE ON
ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT
FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its risk of liability
under the surety bond in favor of JDA and subsequently collected the proceeds of such reinsurance in
the sum of P295,000.00. Defendants' alleged obligation to Pioneer amounts to P295,000.00, hence,
plaintiffs instant action for the recovery of the amount of P298,666.28 from defendants will no longer
prosper. Plaintiff Pioneer is not the real party in interest to institute the instant action as it does not stand
to be benefited or injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from defendants,
hence, it instituted the action is utterly devoid of merit. Plaintiff did not even present any evidence that
it is the attorney-in-fact of the reinsurance company, authorized to institute an action for and in behalf
of the latter. To qualify a person to be a real party in interest in whose name an action must be
prosecuted, he must appear to be the present real owner of the right sought to be enforced (Moran,
Vol. I, Comments on the Rules of Court, 1979 ed., p. 155). It has been held that the real party in interest is
the party who would be benefited or injured by the judgment or the party entitled to the avails of the
suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a present
substantial interest as distinguished from a mere expectancy or a future, contingent, subordinate or
consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600,
385 III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V.
35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in interest as it
has already been paid by the reinsurer the sum of P295,000.00 — the bulk of defendants' alleged
obligation to Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its reinsurer, the
former was able to foreclose extra-judicially one of the subject airplanes and its spare engine, realizing
the total amount of P37,050.00 from the sale of the mortgaged chattels. Adding the sum of P37,050.00,
to the proceeds of the reinsurance amounting to P295,000.00, it is patent that plaintiff has been
overpaid in the amount of P33,383.72 considering that the total amount it had paid to JDA totals to only
P298,666.28. To allow plaintiff Pioneer to recover from defendants the amount in excess of P298,666.28
would be tantamount to unjust enrichment as it has already been paid by the reinsurance company of
the amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis defendant Lim's liability to JDA.
Well settled is the rule that no person should unjustly enrich himself at the expense of another (Article 22,
New Civil Code). (Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner
was paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the
parties herein both in their answers in the court below and in their respective briefs with respondent
court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the
respondents had any interest in the matter since the reinsurance is strictly between the petitioner and
the re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity agreements,
the petitioner is entitled to recover from respondents Bormaheco and Maglana; and (4) the principle of
unjust enrichment is not applicable considering that whatever amount he would recover from the co-
indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money was never raised
by the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:

xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so much of its obligations to JDA as
has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any claim against
defendants, considering the amount it has realized from the sale of the mortgaged properties? (Record
on Appeal, p. 359, Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed in favor of
JDA, collected the proceeds of such reinsurance in the sum of P295,000, and paid with the said amount
the bulk of its alleged liability to JDA under the said surety bond, it is plain that on this score it no longer
has any right to collect to the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants for the
amount paid to it by the reinsurers, notwithstanding that the cause of action pertains to the latter,
Pioneer says: The reinsurers opted instead that the Pioneer Insurance & Surety Corporation shall pursue
alone the case.. . . . Pioneer Insurance & Surety Corporation is representing the reinsurers to recover the
amount.' In other words, insofar as the amount paid to it by the reinsurers Pioneer is suing defendants as
their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint that Pioneer is suing as
attorney-in- fact of the reinsurers for any amount. Lastly, and most important of all, Pioneer has no right
to institute and maintain in its own name an action for the benefit of the reinsurers. It is well-settled that
an action brought by an attorney-in-fact in his own name instead of that of the principal will not
prosper, and this is so even where the name of the principal is disclosed in the complaint.

Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be prosecuted in the name
of the real party in interest.' This provision is mandatory. The real party in interest is the party who would
be benefitted or injured by the judgment or is the party entitled to the avails of the suit.

This Court has held in various cases that an attorney-in-fact is not a real party in interest, that there is no
law permitting an action to be brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18 Phil.
Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial Corporation v. San Diego
G.R. No. L- 22347,1968, 23 SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected P295,000.00 from
the reinsurers, the uninsured portion of what it paid to JDA is the difference between the two amounts,
or P3,666.28. This is the amount for which Pioneer may sue defendants, assuming that the indemnity
agreement is still valid and effective. But since the amount realized from the sale of the mortgaged
chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or a total of
P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has no more claim against
defendants. (Record on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court.
Considering this admitted payment, the only issue that cropped up was the effect of payment made by
the reinsurers to the petitioner. Therefore, the petitioner's argument that the respondents had no interest
in the reinsurance contract as this is strictly between the petitioner as insured and the reinsuring
company pursuant to Section 91 (should be Section 98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are acquired in
similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La.,
46 F 2nd 925).

The rules of practice in actions on original insurance policies are in general applicable to actions or
contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann.
Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount paid by the insurance company does not fully
cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person
causing the loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101
Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v.
Court of Appeals (154 SCRA 650 [1987]):

Note that if a property is insured and the owner receives the indemnity from the insurer, it is provided in
said article that the insurer is deemed subrogated to the rights of the insured against the wrongdoer
and if the amount paid by the insurer does not fully cover the loss, then the aggrieved party is the one
entitled to recover the deficiency. Evidently, under this legal provision, the real party in interest with
regard to the portion of the indemnity paid is the insurer and not the insured. (Emphasis supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the
reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's
complaint as against the respondents for the reason that the petitioner was not the real party in interest
in the complaint and, therefore, has no cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have
been dismissed on the premise that the evidence on record shows that it is entitled to recover from the
counter indemnitors. It does not, however, cite any grounds except its allegation that respondent
"Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate
its finding that the counter-indemnitors are not liable to the petitioner. The trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to be valid and effective after
the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to issue the
bond provided that the same would be mortgaged to it, but this was not possible because the planes
were still in Japan and could not be mortgaged here in the Philippines. As soon as the aircrafts were
brought to the Philippines, they would be mortgaged to Pioneer Insurance to cover the bond, and this
indemnity agreement would be cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties have impaired and rendered insufficient
the security under the chattel mortgage and there is thus no other sufficient security for the claim
sought to be enforced by this action.
This is judicial admission and aside from the chattel mortgage there is no other security for the claim
sought to be enforced by this action, which necessarily means that the indemnity agreement had
ceased to have any force and effect at the time this action was instituted. Sec 2, Rule 129, Revised
Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes and
spare parts, no longer has any further action against the defendants as indemnitors to recover any
unpaid balance of the price. The indemnity agreement was ipso jure extinguished upon the foreclosure
of the chattel mortgage. These defendants, as indemnitors, would be entitled to be subrogated to the
right of Pioneer should they make payments to the latter. Articles 2067 and 2080 of the New Civil Code
of the Philippines.

Independently of the preceding proposition Pioneer's election of the remedy of foreclosure precludes
any further action to recover any unpaid balance of the price.

SAL or Lim, having failed to pay the second to the eight and last installments to JDA and Pioneer as
surety having made of the payments to JDA, the alternative remedies open to Pioneer were as
provided in Article 1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial foreclosure
and the instant suit. Such being the case, as provided by the aforementioned provisions, Pioneer shall
have no further action against the purchaser to recover any unpaid balance and any agreement to
the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance Corp. No. L- 24772, May 27,1968, 23
SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through the contention that Pioneer
is not the vendor but JDA. The reason is that Pioneer is actually exercising the rights of JDA as vendor,
having subrogated it in such rights. Nor may the application of the provision be validly opposed on the
ground that these defendants and defendant Maglana are not the vendee but indemnitors. Pascual,
et al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates discharged
these defendants from any liability as alleged indemnitors. The change of the maturity dates of the
obligations of Lim, or SAL extinguish the original obligations thru novations thus discharging the
indemnitors.

The principal hereof shall be paid in eight equal successive three months interval installments, the first of
which shall be due and payable 25 August 1965, the remainder of which ... shall be due and payable
on the 26th day x x x of each succeeding three months and the last of which shall be due and payable
26th May 1967.

However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim and JDA,
modifying the maturity dates of the obligations, as follows:

The principal hereof shall be paid in eight equal successive three month interval installments the first of
which shall be due and payable 4 September 1965, the remainder of which ... shall be due and
payable on the 4th day ... of each succeeding months and the last of which shall be due and payable
4th June 1967.

Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates different
from that fixed in the aforesaid memorandum; the due date of the first installment appears as October
15, 1965, and those of the rest of the installments, the 15th of each succeeding three months, that of the
last installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates, effected twice, were done
without the knowledge, much less, would have it believed that these defendants Maglana (sic).
Pioneer's official Numeriano Carbonel would have it believed that these defendants and defendant
Maglana knew of and consented to the modification of the obligations. But if that were so, there would
have been the corresponding documents in the form of a written notice to as well as written conformity
of these defendants, and there are no such document. The consequence of this was the
extinguishment of the obligations and of the surety bond secured by the indemnity agreement which
was thereby also extinguished. Applicable by analogy are the rulings of the Supreme Court in the case
of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon
David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty The mere failure on the part of the creditor to demand payment after the
debt has become due does not of itself constitute any extension time referred to herein, (New Civil
Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v. Climacom et al.
(C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same. Consequently,
Pioneer has no more cause of action to recover from these defendants, as supposed indemnitors, what
it has paid to JDA. By virtue of an express stipulation in the surety bond, the failure of JDA to present its
claim to Pioneer within ten days from default of Lim or SAL on every installment, released Pioneer from
liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such
payment is made after the obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees from Pioneer and its surety by
reason of the filing of the instant case against them and the attachment and garnishment of their
properties. The instant action is clearly unfounded insofar as plaintiff drags these defendants and
defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose agreement was to do business
through the corporate vehicle but who failed to incorporate the entity in which they had chosen to
invest? How are the losses to be treated in situations where their contributions to the intended
'corporation' were invested not through the corporate form? This Petition presents these fundamental
questions which we believe were resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of respondents
Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de
facto partnership among them was created, and that as a consequence of such relationship all must
share in the losses and/or gains of the venture in proportion to their contribution. The petitioner,
therefore, questions the appellate court's findings ordering him to reimburse certain amounts given by
the respondents to the petitioner as their contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the total
amount of P184,878.74 as correctly found by the trial court, with interest from the filing of the cross-
complaints until the amount is fully paid. Defendant Lim should pay one-half of the said amount to
Bormaheco and the Cervanteses and the other one-half to defendant Maglana. It is established in the
records that defendant Lim had duly received the amount of Pl51,000.00 from defendants Bormaheco
and Maglana representing the latter's participation in the ownership of the subject airplanes and spare
parts (Exhibit 58). In addition, the cross-party plaintiffs incurred additional expenses, hence, the total sum
of P 184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the stockholders in a defectively
incorporated association should be governed by the supposed charter and the laws of the state
relating thereto and not by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121, 96 Md.
446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt, but fail, to form a corporation and
who carry on business under the corporate name occupy the position of partners inter se (Lynch v.
Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate themselves
together under articles to purchase property to carry on a business, and their organization is so
defective as to come short of creating a corporation within the statute, they become in legal effect
partners inter se, and their rights as members of the company to the property acquired by the company
will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29
Mich. 369). So, where certain persons associated themselves as a corporation for the development of
land for irrigation purposes, and each conveyed land to the corporation, and two of them contracted
to pay a third the difference in the proportionate value of the land conveyed by him, and no stock was
ever issued in the corporation, it was treated as a trustee for the associates in an action between them
for an accounting, and its capital stock was treated as partnership assets, sold, and the proceeds
distributed among them in proportion to the value of the property contributed by each (Shorb v.
Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist, for ordinarily persons cannot
be made to assume the relation of partners, as between themselves, when their purpose is that no
partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed.
688), and it should be implied only when necessary to do justice between the parties; thus, one who
takes no part except to subscribe for stock in a proposed corporation which is never legally formed
does not become a partner with other subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership
and contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between certain stockholders
and other stockholders, who were also directors, will not be implied in the absence of an agreement, so
as to make the former liable to contribute for payment of debts illegally contracted by the latter (Heald
v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear
during the pretrial despite notification. In his answer, the petitioner denied having received any amount
from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the appellate court,
however, found through Exhibit 58, that the petitioner received the amount of P151,000.00 representing
the participation of Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject
airplanes and spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner
Jacob Lim thru the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with the
respondents despite his representations to them. This gives credence to the cross-claims of the
respondents to the effect that they were induced and lured by the petitioner to make contributions to a
proposed corporation which was never formed because the petitioner reneged on their agreement.
Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to expand his
airline business. Lim was to procure two DC-3's from Japan and secure the necessary certificates of
public convenience and necessity as well as the required permits for the operation thereof. Maglana
sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery to Lim which Cervantes did
and Lim acknowledged receipt thereof. Cervantes, likewise, delivered his share of the undertaking. Lim
in an undertaking sometime on or about August 9,1965, promised to incorporate his airline in
accordance with their agreement and proceeded to acquire the planes on his own account. Since
then up to the filing of this answer, Lim has refused, failed and still refuses to set up the corporation or
return the money of Maglana. (Record on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim
and third party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering defendants to purchase two
airplanes and spare parts from Japan which the latter considered as their lawful contribution and
participation in the proposed corporation to be known as SAL. Arrangements and negotiations were
undertaken by defendant Lim. Down payments were advanced by defendants Bormaheco and the
Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to the agreement among the defendants,
defendant Lim in connivance with the plaintiff, signed and executed the alleged chattel mortgage and
surety bond agreement in his personal capacity as the alleged proprietor of the SAL. The answering
defendants learned for the first time of this trickery and misrepresentation of the other, Jacob Lim, when
the herein plaintiff chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them
to file an adverse claim in the form of third party claim. Notwithstanding repeated oral demands made
by defendants Bormaheco and Cervanteses, to defendant Lim, to surrender the possession of the two
planes and their accessories and or return the amount advanced by the former amounting to an
aggregate sum of P 178,997.14 as evidenced by a statement of accounts, the latter ignored, omitted
and refused to comply with them. (Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto
partnership was created among the parties which would entitle the petitioner to a reimbursement of
the supposed losses of the proposed corporation. The record shows that the petitioner was acting on his
own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes and
spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is
AFFIRMED.

SO ORDERED.
G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

A partnership may be deemed to exist among parties who agree to borrow money to pursue a business
and to divide the profits or losses that may arise therefrom, even if it is shown that they have not
contributed any capital of their own to a "common fund." Their contribution may be in the form of credit
or industry, not necessarily cash or fixed assets. Being partners, they are all liable for debts incurred by or
on behalf of the partnership. The liability for a contract entered into on behalf of an unincorporated
association or ostensible corporation may lie in a person who may not have directly transacted on its
behalf, but reaped benefits from that contract.

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision of
the Court of Appeals in CA-GR CV 41477,[1] which disposed as follows:

WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby affirmed. [2]

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the CA,
reads as follows:

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on September 20, 1990;

2. That defendants are jointly liable to plaintiff for the following amounts, subject to the modifications as hereinafter made by
reason of the special and unique facts and circumstances and the proceedings that transpired during the trial of this case;

a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the Agreement plus P68,000.00
representing the unpaid price of the floats not covered by said Agreement;

b. 12% interest per annum counted from date of plaintiffs invoices and computed on their respective amounts as follows:

i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February 9, 1990;

ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated February 13, 1990;

iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February 19, 1990;

c. P50,000.00 as and for attorneys fees, plus P8,500.00 representing P500.00 per appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets counted from September 20, 1990 (date of
attachment) to September 12, 1991 (date of auction sale);

e. Cost of suit.

With respect to the joint liability of defendants for the principal obligation or for the unpaid price of nets and floats in the amount
of P532,045.00 and P68,000.00, respectively, or for the total amount of P600,045.00, this Court noted that these items were
attached to guarantee any judgment that may be rendered in favor of the plaintiff but, upon agreement of the parties, and, to
avoid further deterioration of the nets during the pendency of this case, it was ordered sold at public auction for not less
than P900,000.00 for which the plaintiff was the sole and winning bidder. The proceeds of the sale paid for by plaintiff was
deposited in court.In effect, the amount of P900,000.00 replaced the attached property as a guaranty for any judgment that
plaintiff may be able to secure in this case with the ownership and possession of the nets and floats awarded and delivered by
the sheriff to plaintiff as the highest bidder in the public auction sale. It has also been noted that ownership of the nets [was]
retained by the plaintiff until full payment [was] made as stipulated in the invoices; hence, in effect, the plaintiff attached its own
properties. It [was] for this reason also that this Court earlier ordered the attachment bond filed by plaintiff to guaranty damages
to defendants to be cancelled and for the P900,000.00 cash bidded and paid for by plaintiff to serve as its bond in favor of
defendants.

From the foregoing, it would appear therefore that whatever judgment the plaintiff may be entitled to in this case will have to be
satisfied from the amount of P900,000.00 as this amount replaced the attached nets and floats. Considering, however, that the
total judgment obligation as computed above would amount to only P840,216.92, it would be inequitable, unfair and unjust to
award the excess to the defendants who are not entitled to damages and who did not put up a single centavo to raise the
amount of P900,000.00 aside from the fact that they are not the owners of the nets and floats. For this reason, the defendants are
hereby relieved from any and all liabilities arising from the monetary judgment obligation enumerated above and for plaintiff to
retain possession and ownership of the nets and floats and for the reimbursement of the P900,000.00 deposited by it with the Clerk
of Court.

SO ORDERED. [3]

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract
dated February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear
Industries, Inc. (herein respondent). They claimed that they were engaged in a business venture with
Petitioner Lim Tong Lim, who however was not a signatory to the agreement. The total price of the nets
amounted to P532,045. Four hundred pieces of floats worth P68,000 were also sold to the Corporation.[4]

The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondent filed a
collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary
attachment. The suit was brought against the three in their capacities as general partners, on the
allegation that Ocean Quest Fishing Corporation was a nonexistent corporation as shown by a
Certification from the Securities and Exchange Commission.[5] On September 20, 1990, the lower court
issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets on
board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.

Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a
reasonable time within which to pay. He also turned over to respondent some of the nets which were in
his possession. Peter Yao filed an Answer, after which he was deemed to have waived his right to cross-
examine witnesses and to present evidence on his behalf, because of his failure to appear in
subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with Counterclaim and
Crossclaim and moved for the lifting of the Writ of Attachment.[6] The trial court maintained the Writ, and
upon motion of private respondent, ordered the sale of the fishing nets at a public auction. Philippine
Fishing Gear Industries won the bidding and deposited with the said court the sales proceeds
of P900,000.[7]

On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear Industries
was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly
liable to pay respondent.[8]

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies
of the witnesses presented and (2) on a Compromise Agreement executed by the three[9] in Civil Case
No. 1492-MN which Chua and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a
declaration of nullity of commercial documents; (b) a reformation of contracts; (c) a declaration of
ownership of fishing boats; (d) an injunction and (e) damages.[10]The Compromise Agreement provided:

a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in the amount
of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be applied as full payment
for P3,250,000.00 in favor of JL Holdings Corporation and/or Lim Tong Lim;

b) If the four (4) vessel[s] and the fishing net will be sold at a higher price than P5,750,000.00 whatever
will be the excess will be divided into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;

c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the deficiency shall be
shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao. [11]

The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but
that joint liability could be presumed from the equal distribution of the profit and loss. [12]

Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.

Ruling of the Court of Appeals

In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing
business and may thus be held liable as a such for the fishing nets and floats purchased by and for the
use of the partnership. The appellate court ruled:

The evidence establishes that all the defendants including herein appellant Lim Tong Lim undertook a
partnership for a specific undertaking, that is for commercial fishing x x x.Obviously, the ultimate
undertaking of the defendants was to divide the profits among themselves which is what a partnership
essentially is x x x. By a contract of partnership, two or more persons bind themselves to contribute
money, property or industry to a common fund with the intention of dividing the profits among
themselves (Article 1767, New Civil Code).[13]

Hence, petitioner brought this recourse before this Court.[14]

The Issues

In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the following
grounds:

I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT THAT CHUA, YAO
AND PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED
AMONG THEM.

II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN QUEST FISHING
CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS
UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM AS WELL.

III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF PETITIONER LIMS GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats purchased from
respondent, the Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could be
deemed to have entered into a partnership.
This Courts Ruling

The Petition is devoid of merit.

First and Second Issues: Existence of a Partnership and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from respondent, petitioner
controverts the CA finding that a partnership existed between him, Peter Yao and Antonio Chua. He
asserts that the CA based its finding on the Compromise Agreement alone.Furthermore, he disclaims
any direct participation in the purchase of the nets, alleging that the negotiations were conducted by
Chua and Yao only, and that he has not even met the representatives of the respondent
company. Petitioner further argues that he was a lessor, not a partner, of Chua and Yao, for the
"Contract of Lease" dated February 1, 1990, showed that he had merely leased to the two the main
asset of the purported partnership -- the fishing boat F/B Lourdes. The lease was for six months, with a
monthly rental of P37,500 plus 25 percent of the gross catch of the boat.

We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts
clearly showed that there existed a partnership among Chua, Yao and him, pursuant to Article 1767 of
the Civil Code which provides:

Article 1767 - By the contract of partnership, two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among themselves.

Specifically, both lower courts ruled that a partnership among the three existed based on the following
factual findings:[15]

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing to join
him, while Antonio Chua was already Yaos partner;

(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to acquire two fishing
boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;

(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to finance the
venture.

(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale over
these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security for the loan extended by
Jesus Lim;

(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing, dry docking and
other expenses for the boats would be shouldered by Chua and Yao;

(6) That because of the unavailability of funds, Jesus Lim again extended a loan to the partnership in
the amount of P1 million secured by a check, because of which, Yao and Chua entrusted the
ownership papers of two other boats, Chuas FB Lady Anne Mel and Yaos FB Tracy to Lim Tong Lim.

(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets from
Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their purported
business name.

(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by Antonio Chua
and Peter Yao against Lim Tong Lim for (a) declaration of nullity of commercial documents; (b)
reformation of contracts; (c) declaration of ownership of fishing boats; (4) injunction; and (e) damages.

(9) That the case was amicably settled through a Compromise Agreement executed between the
parties-litigants the terms of which are already enumerated above.

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to
engage in a fishing business, which they started by buying boats worth P3.35 million, financed by a loan
secured from Jesus Lim who was petitioners brother. In their Compromise Agreement, they subsequently
revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide
equally among them the excess or loss. These boats, the purchase and the repair of which were
financed with borrowed money, fell under the term common fund under Article 1767.The contribution to
such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the
parties agreed that any loss or profit from the sale and operation of the boats would be divided equally
among them also shows that they had indeed formed a partnership.

Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that
of the nets and the floats. The fishing nets and the floats, both essential to fishing, were obviously
acquired in furtherance of their business. It would have been inconceivable for Lim to involve himself so
much in buying the boat but not in the acquisition of the aforesaid equipment, without which the
business could not have proceeded.

Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership
engaged in the fishing business. They purchased the boats, which constituted the main assets of the
partnership, and they agreed that the proceeds from the sales and operations thereof would be
divided among them.

We stress that under Rule 45, a petition for review like the present case should involve only questions of
law. Thus, the foregoing factual findings of the RTC and the CA are binding on this Court, absent any
cogent proof that the present action is embraced by one of the exceptions to the rule. [16] In assailing
the factual findings of the two lower courts, petitioner effectively goes beyond the bounds of a petition
for review under Rule 45.
Compromise Agreement Not the Sole Basis of Partnership

Petitioner argues that the appellate courts sole basis for assuming the existence of a partnership was the
Compromise Agreement. He also claims that the settlement was entered into only to end the dispute
among them, but not to adjudicate their preexisting rights and obligations. His arguments are
baseless. The Agreement was but an embodiment of the relationship extant among the parties prior to
its execution.

A proper adjudication of claimants rights mandates that courts must review and thoroughly appraise all
relevant facts. Both lower courts have done so and have found, correctly, a preexisting partnership
among the parties. In implying that the lower courts have decided on the basis of one piece of
document alone, petitioner fails to appreciate that the CA and the RTC delved into the history of the
document and explored all the possible consequential combinations in harmony with law, logic and
fairness. Verily, the two lower courts factual findings mentioned above nullified petitioners argument
that the existence of a partnership was based only on the Compromise Agreement.
Petitioner Was a Partner, Not a Lessor

We are not convinced by petitioners argument that he was merely the lessor of the boats to Chua and
Yao, not a partner in the fishing venture. His argument allegedly finds support in the Contract of Lease
and the registration papers showing that he was the owner of the boats, including F/B Lourdes where
the nets were found.

His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale
of his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided
among the three of them. No lessor would do what petitioner did. Indeed, his consent to the sale
proved that there was a preexisting partnership among all three.

Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in
which debts were undertaken in order to finance the acquisition and the upgrading of the vessels
which would be used in their fishing business. The sale of the boats, as well as the division among the
three of the balance remaining after the payment of their loans, proves beyond cavil that F/B Lourdes,
though registered in his name, was not his own property but an asset of the partnership. It is not
uncommon to register the properties acquired from a loan in the name of the person the lender trusts,
who in this case is the petitioner himself. After all, he is the brother of the creditor, Jesus Lim.

We stress that it is unreasonable indeed, it is absurd -- for petitioner to sell his property to pay a debt he
did not incur, if the relationship among the three of them was merely that of lessor-lessee, instead of
partners.
Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to
Chua and Yao, and not to him. Again, we disagree.

Section 21 of the Corporation Code of the Philippines provides:

Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided however, That when any such ostensible corporation is
sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall
not be allowed to use as a defense its lack of corporate personality.

One who assumes an obligation to an ostensible corporation as such, cannot resist performance
thereof on the ground that there was in fact no corporation.

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be
estopped from denying its corporate existence. The reason behind this doctrine is obvious - an
unincorporated association has no personality and would be incompetent to act and appropriate for
itself the power and attributes of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport to act as its representatives or
agents do so without authority and at their own risk. And as it is an elementary principle of law that a
person who acts as an agent without authority or without a principal is himself regarded as the
principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has no valid existence assumes such privileges and
obligations and becomes personally liable for contracts entered into or for other acts performed as
such agent.[17]

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In
the first instance, an unincorporated association, which represented itself to be a corporation, will be
estopped from denying its corporate capacity in a suit against it by a third person who relied in good
faith on such representation. It cannot allege lack of personality to be sued to evade its responsibility for
a contract it entered into and by virtue of which it received advantages and benefits.

On the other hand, a third party who, knowing an association to be unincorporated, nonetheless
treated it as a corporation and received benefits from it, may be barred from denying its corporate
existence in a suit brought against the alleged corporation. In such case, all those who benefited from
the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be
held liable for contracts they impliedly assented to or took advantage of.

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the
nets it sold. The only question here is whether petitioner should be held jointly[18]liable with Chua and
Yao. Petitioner contests such liability, insisting that only those who dealt in the name of the ostensible
corporation should be held liable. Since his name does not appear on any of the contracts and since
he never directly transacted with the respondent corporation, ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which
has earlier been proven to be an asset of the partnership. He in fact questions the attachment of the
nets, because the Writ has effectively stopped his use of the fishing vessel.

It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting parties in representation of it. Clearly, under the law
on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be without
valid existence, are held liable as general partners.

Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having
reaped the benefits of the contract entered into by persons with whom he previously had an existing
relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of
corporation by estoppel. We reiterate the ruling of the Court in Alonso v. Villamor:[19]

A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle
art of movement and position , entraps and destroys the other. It is, rather, a contest in which each
contending party fully and fairly lays before the court the facts in issue and then, brushing aside as
wholly trivial and indecisive all imperfections of form and technicalities of procedure, asks that justice be
done upon the merits. Lawsuits, unlike duels, are not to be won by a rapiers thrust. Technicality, when it
deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy,
deserves scant consideration from courts. There should be no vested rights in technicalities.
Third Issue: Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets.We agree
with the Court of Appeals that this issue is now moot and academic. As previously discussed, F/B
Lourdes was an asset of the partnership and that it was placed in the name of petitioner, only to assure
payment of the debt he and his partners owed. The nets and the floats were specifically manufactured
and tailor-made according to their own design, and were bought and used in the fishing venture they
agreed upon. Hence, the issuance of the Writ to assure the payment of the price stipulated in the
invoices is proper. Besides, by specific agreement, ownership of the nets remained with Respondent
Philippine Fishing Gear, until full payment thereof.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

SO ORDERED.
EN BANC

[G.R. No. L-4935. May 28, 1954.]

J.M. TUASON & CO., INC., represented by its Managing PARTNER, GREGORIO ARANETA, INC., Plaintiff-
Appellee, v. QUIRINO BOLAÑOS, Defendant-Appellant.

Araneta & Araneta for Appellee.

Jose A. Buendia for Appellant.

SYLLABUS

1. PARTIES; REAL PARTY IN INTEREST; ATTORNEY MAY BRING ACTION IN THE PLAINTIFF’S NAME. — Section 2
of the Rules of Court requires that an action be brought in the name of, but not necessarily by, the real
property interest. In fact the practice is for an attorney-at-law to bring the action, that is, to file the
complaint, in the name of the plaintiff.

2. ID.; CORPORATION AS PARTY MAY BE REPRESENTED BY ANOTHER PERSON. NATURAL OR JUDICIAL. —

There is nothing against one corporation being represented by another person, natural or juridical, in a
suit in court, for the true rule is that "although a corporation has no power to enter into a partnership, it
may nevertheless enter into a joint venture with another where the nature of that venture is in line with
the business authorized by its charter." (Wyoming-Indiana Oil Gas Co. v. Weston, 80 A.L.R., 1043, citing 2
Fletcher Cyc. E. 1082.)

3. COMPLAINTS; AMENDMENTS TO CONFIRM TO EVIDENCE NOT NECESSARY TO RENDER JUDGMENT ON

FACTS PROVED THOUGH NOT ALLEGED. — Where the facts shown entitled plaintiff to relief other than
that asked for, no amendment to the complaint is necessary, especially where defendant has himself
raised the point on which recovery is based, and the appellate court may treat the pleading as
amended to confirm to the evidence, although the pleadings were not actually amended. (Citing
Maran, Rules of Court, 1952 ed., 389-390.)

4. LAND REGISTRATION; REOPENING OF DECREE AFTER ONE YEAR, NOT ALLOWED. — A decree of
registration can no longer be impugned on the ground of fraud, error or lack of notice to defendant,
after one year has elapsed from the issuance and entry of the decree. Neither could the decree be
collaterally attacked by any person claiming title to, or interest in, the land prior to the registration
proceedings, nor could title to that land in derogation of that of plaintiff be acquired by adverse
possession or prescription since adverse, notorious and continuous possession under claim of ownership
is ineffective against Torrens title ands the right to secure possession under a decree of registration does
not prescribe.

5. ACTIONS; IDENTITY OF CAUSE OF ACTION. — Where one action is for the recovery of ownership and
the other is for recovery of possession, there is no identity of cause of action.

6. ID.; CLASS SUIT. — Where the action seeks relief for each individual plaintiff and not relief for and on
behalf of others, the action is not a class suit.

DECISIOn

REYES, J.:

This is an action originally brought in the Court of First Instance of Rizal, Quezon City Branch, to recover
possession of registered land situated in barrio Tatalon, Quezon City.

Plaintiff’s complaint was amended three times with respect to the extent and description of the land
sought to be recovered. The original complaint described the land as a portion of a lot registered in
plaintiff’s name under Transfer Certificate of Title No. 37686 of the land record of Rizal Province and as
containing an area of 13 hectares more or less. But the complaint was amended by reducing the area
to 6 hectares, more or less, after defendant had indicated the plaintiff’s surveyors the portion of land
claimed and occupied by him. The second amendment became necessary and was allowed following
the testimony of plaintiff’s surveyors that a portion of the area was embraced in another certificate of
title, which was plaintiff’s Transfer Certificate of Title No. 37677. And still later, in the course of trial, after
defendant’s surveyor and witness, Quirino Feria, had testified that the area occupied and claimed by
defendant was about 13 hectares, as shown in his Exhibit 1, plaintiff again, with the leave of court,
amended its complaint to make its allegations conform to the evidence.

Defendant, in his answer, sets up prescription and title in himself thru "open, continuous, exclusive and
public and notorious possession (of the land in dispute) under claim of ownership, adverse to the entire
world by defendant and his predecessors in interest" from "time immemorial." The answer further alleges
that registration of the land in dispute was obtained by plaintiff or its predecessors in interest thru "fraud
or error and without knowledge (of) or notice either personal or thru publication to defendant and/or
predecessors in interest." The answer therefore prays that the complaint be dismissed with costs and
plaintiff required to reconvey the land to defendant or pay its value.

After trial, the lower court rendered judgment for plaintiff, declaring defendant to be without any right
to the land in question and ordering him to restore possession thereof to plaintiff and to pay the latter a
monthly rent of P132.62 from January, 1940, until he vacates the land, and also to pay the costs.

Appealing directly to this court because of the value of the property involved, defendant makes the
following assignment of errors:jgc:chanrobles.com.ph

"I. The trial court erred in not dismissing the case on the ground that the case was not brought by the
real party in interest.

"II. The trial court erred in admitting the third amended complaint.

"III. The trial court erred in denying defendant’s motion to strike.

"IV. The trial court erred in including in its decision land not involved in the litigation.

"V. The trial court erred in holding that the land in dispute is covered by transfer certificates of Title Nos.
37686 and 37677.

"VI. The trial court erred in not finding that the defendant is the true and lawful owner of the land.

"VII. The trial court erred in finding that the defendant is liable to pay the plaintiff the amount of P132.62
monthly from January, 1940, until he vacates the premises.

"VIII. The trial court erred in not ordering the plaintiff to reconvey the land in litigation to the
defendant."cralaw virtua1aw library

As to the first assigned error, there is nothing to the contention that the present action is not brought by
the real party in interest, that is, by J. M. Tuason & Co., Inc. What the Rules of Court require is that an
action be brought in the name of, but not necessarily by, the real party in interest. (Section 2, Rule 2.) In
fact the practice is for an attorney-at-law to bring the action, that is to file the complaint, in the name
of the plaintiff. That practice appears to have been followed in this case, since the complaint is signed
by the law firm of Araneta & Araneta, "counsel for plaintiff" and commences with the statement "Comes
now plaintiff, through its undersigned counsel." It is true that the complaint also states that the plaintiff is
"represented herein by its Managing Partner Gregorio Araneta, Inc.", another corporation, but there is
nothing against one corporation being represented by another person, natural or juridical, in a suit in
court. The contention that Gregorio Araneta, Inc. can not act as managing partner for plaintiff on the
theory that it is illegal for two corporations to enter into a partnership is without merit, for the true rule is
that "though a corporation has no power to enter into a partnership, it may nevertheless enter into a
joint venture with another where the nature of that venture is in line with the business authorized by its
charter." (Wyoming-Indiana Oil Gas Co. v. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of Corp.,
1082.) There is nothing in the record to indicate that the venture in which plaintiff is represented by
Gregorio Araneta, Inc. as "its managing partner" is not in line with the corporate business of either of
them.

Errors II, III, and IV, referring to the admission of the third amended complaint, may be answered by
mere reference to section 4 of Rule 17, Rules of Court, which sanctions such amendment. It reads:

SEC. 4. Amendment to conform to evidence. — When issues not raised by the pleadings are tried by
express or implied consent of the parties, they shall be treated in all respects, as if they had been raised
in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to
the evidence and to raise these issues may be made upon motion of any party at my time, even after
judgment; but failure so to amend does not affect the result of the trial of these issues. If evidence is
objected to at the trial on the ground that it is not within the issues made by the pleadings, the court
may allow the pleadings to be amended and shall be so freely when the presentation of the merits of
the action will be subserved thereby and the objecting party fails to satisfy the court that the admission
of such evidence would prejudice him in maintaining his action or defense upon the merits. The court
may grant a continuance to enable the objecting party to meet such evidence."

Under this provision amendment is not even necessary for the purpose of rendering judgment on issues
proved though not alleged. Thus, commenting on the provision, Chief Justice Moran says in his Rules of
Court:

"Under this section, American courts have, under the New Federal Rules of Civil Procedure, ruled that
where the facts shown entitled plaintiff to relief other than that asked for, no amendment to the
complaint is necessary, especially where defendant has himself raised the point on which recovery is
based, and that the appellate court treat the pleadings as amended to conform to the evidence,
although the pleadings were not actually amended." (I Moran, Rules of Court, 1952 ed., 389-390.)
Our conclusion therefore is that specification of error II, III, and IV are without merit.

Let us now pass on the errors V and VI. Admitting, through his attorney, at the early stage of the trial,
that the land in dispute "is that described or represented in Exhibit A and in Exhibit B enclosed in red
pencil with the name Quirino Bolaños," defendant later changed his lawyer and also his theory and tried
to prove that the land in dispute was not covered by plaintiff’s certificate of title. The evidence,
however, is against defendant, for it clearly establishes that plaintiff is the registered owner of lot No. 4-B-
3-C, situate in barrio Tatalon, Quezon City, with an area of 5,297,429.3 square meters, more or less,
covered by transfer certificate of title No. 37686 of the land records of Rizal province, and of lot No. 4-B-
4, situated in the same barrio, having an area of 74,789 square meters, more or less, covered by transfer
certificate of title No. 37677 of the land records of the same province, both lots having been originally
registered on July 8, 1914 under original certificate of title No. 735. The identity of the lots was established
by the testimony of Antonio Manahan and Magno Faustino, witnesses for plaintiff, and the identity of
the portion thereof claimed by defendant was established by the testimony of his own witness, Quirico
Feria. The combined testimony of these three witnesses clearly shows that the portion claimed by
defendant is made up of a part of lot 4 B- 3-C and major on portion of lot 4-B-4, and is well within the
area covered by the two transfer certificates of title already mentioned. This fact also appears admitted
in defendant’s answer to the third amended complaint.

As the land in dispute is covered by plaintiff’s Torrens certificate of title and was registered in 1914, the
decree of registration can no longer be impugned on the ground of fraud, error or lack of notice to
defendant, as more than one year has already elapsed from the issuance and entry of the decree.
Neither could the decree be collaterally attacked by any person claiming title to, or interest in, the land
prior to the registration proceedings. (Soroñgon v. Makalintal, 1 45 Off. Gaz., 3819.) Nor could title to that
land in derogation of that of plaintiff, the registered owner, be acquired by prescription or adverse
possession. (Section 46, Act No. 496.) Adverse, notorious and continuous possession under claim of
ownership for the period fixed by law is ineffective against a Torrens title. (Valiente v. Judge of CFI of
Tarlac, 2 etc., 45 Off. Gaz., Supp. 9, p. 43.) And it is likewise settled that the right to secure possession
under a decree of registration does not prescribe. (Francisco v. Cruz, 43 Off. Gaz., 5105, 5109-5110.) A
recent decision of this Court on this point is that rendered in the case of Jose Alcantara Et. Al., v.
Marinao Et. Al., 92 Phil., 796. This disposes of the alleged errors V and VI.

As to error VII, it is claimed that ’there was no evidence to sustain the finding that defendant should be
sentenced to pay plaintiff P132.62 monthly from January, 1940, until he vacates the premises." But it
appears from the record that the reasonable compensation for the use and occupation of the
premises, as stipulated at the hearing was P10 a month for each hectare and that the area occupied
by defendant was 13.2619 hectares. The total rent to be paid for the area occupied should therefore
be P132.62 a month. It also appears from the testimony of J. A. Araneta and witness Emigdio Tanjuatco
that as early as 1939 an action of ejectment had already been filed against defendant. And it cannot
be supposed that defendant has been paying rents, for he has been asserting all along that the
premises in question "have always been since time immemorial in open, continuous, exclusive and
public and notorious possession and under claim of ownership adverse to the entire world by defendant
and his predecessors in interest." This assignment of error is thus clearly without merit.

Error No. VIII is but a consequence of the other errors alleged and needs for further consideration.

During the pendency of this case in this Court appellant, thru other counsel, has filed a motion to dismiss
alleging that there is pending before the Court of First Instance of Rizal another action between the
same parties and for the same cause and seeking to sustain that allegation with a copy of the
complaint filed in said action. But an examination of that complaint reveals that appellant’s allegation
is not correct, for the pretended identity of parties and cause of action in the two suits does not appear.
That other case is one for recovery of ownership, while the present one is for recovery of possession. And
while appellant claims that he is also involved in that other action because it is a class suit, the
complaint does not show that such is really the case. On the contrary, it appears that the action seeks
relief for each individual plaintiff and not relief for and on behalf of others. The motion for dismissal is
clearly without merit.

Wherefore, the judgment appealed from is affirmed, with costs against the Appellant.
 [JOINT VENTURE]

G.R. No. 75875 December 15, 1989

WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO,
JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V.
CRUZ, respondents.

G.R. No. 75951 December 15, 1989

SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE B. LAGDAMEO,

GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V. CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM, CHARLES
CHAMSAY and LUCIANO SALAZAR, respondents.

G.R. Nos. 75975-76 December 15, 1989

LUCIANO E. SALAZAR, petitioner,

vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO,
JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG, AVELINO V. CRUZ and
the COURT OF APPEALS, respondents.

These consolidated petitions seek the review of the amended decision of the Court of Appeals in CA-
G.R. SP Nos. 05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the then
Intermediate Appellate Court and directed that in all subsequent elections for directors of Sanitary
Wares Manufacturing Corporation (Saniwares), American Standard Inc. (ASI) cannot nominate more
than three (3) directors; that the Filipino stockholders shall not interfere in ASI's choice of its three (3)
nominees; that, on the other hand, the Filipino stockholders can nominate only six (6) candidates and in
the event they cannot agree on the six (6) nominees, they shall vote only among themselves to
determine who the six (6) nominees will be, with cumulative voting to be allowed but without
interference from ASI.

The antecedent facts can be summarized as follows:

In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing
and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for
foreign partners, European or American who could help in its expansion plans. On August 15, 1962, ASI,
a foreign corporation domiciled in Delaware, United States entered into an Agreement with Saniwares
and some Filipino investors whereby ASI and the Filipino investors agreed to participate in the ownership
of an enterprise which would engage primarily in the business of manufacturing in the Philippines and
selling here and abroad vitreous china and sanitary wares. The parties agreed that the business
operations in the Philippines shall be carried on by an incorporated enterprise and that the name of the
corporation shall initially be "Sanitary Wares Manufacturing Corporation."

The Agreement has the following provisions relevant to the issues in these cases on the nomination and
election of the directors of the corporation:

3. Articles of Incorporation

(a) The Articles of Incorporation of the Corporation shall be substantially in the form
annexed hereto as Exhibit A and, insofar as permitted under Philippine law, shall
specifically provide for

(1) Cumulative voting for directors:

xxx xxx xxx

5. Management

(a) The management of the Corporation shall be vested in a Board of Directors, which
shall consist of nine individuals. As long as American-Standard shall own at least 30% of
the outstanding stock of the Corporation, three of the nine directors shall be designated
 by American-Standard, and the other six shall be designated by the other stockholders
of the Corporation. (pp. 51 & 53, Rollo of 75875)

At the request of ASI, the agreement contained provisions designed to protect it as a minority group,
including the grant of veto powers over a number of corporate acts and the right to designate certain
officers, such as a member of the Executive Committee whose vote was required for important
corporate transactions.

Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with the
Board of Investments for availment of incentives with the condition that at least 60% of the capital stock
of the corporation shall be owned by Philippine nationals.

The joint enterprise thus entered into by the Filipino investors and the American corporation prospered.
Unfortunately, with the business successes, there came a deterioration of the initially harmonious
relations between the two groups. According to the Filipino group, a basic disagreement was due to
their desire to expand the export operations of the company to which ASI objected as it apparently
had other subsidiaries of joint joint venture groups in the countries where Philippine exports were
contemplated. On March 8, 1983, the annual stockholders' meeting was held. The meeting was
presided by Baldwin Young. The minutes were taken by the Secretary, Avelino Cruz. After disposing of
the preliminary items in the agenda, the stockholders then proceeded to the election of the members
of the board of directors. The ASI group nominated three persons namely; Wolfgang Aurbach, John
Griffin and David P. Whittingham. The Philippine investors nominated six, namely; Ernesto Lagdameo, Sr.,
Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin Young. Mr. Eduardo R, Ceniza
then nominated Mr. Luciano E. Salazar, who in turn nominated Mr. Charles Chamsay. The chairman,
Baldwin Young ruled the last two nominations out of order on the basis of section 5 (a) of the
Agreement, the consistent practice of the parties during the past annual stockholders' meetings to
nominate only nine persons as nominees for the nine-member board of directors, and the legal advice
of Saniwares' legal counsel. The following events then, transpired:

... There were protests against the action of the Chairman and heated arguments
ensued. An appeal was made by the ASI representative to the body of stockholders
present that a vote be taken on the ruling of the Chairman. The Chairman, Baldwin
Young, declared the appeal out of order and no vote on the ruling was taken. The
Chairman then instructed the Corporate Secretary to cast all the votes present and
represented by proxy equally for the 6 nominees of the Philippine Investors and the 3
nominees of ASI, thus effectively excluding the 2 additional persons nominated, namely,
Luciano E. Salazar and Charles Chamsay. The ASI representative, Mr. Jaqua protested
the decision of the Chairman and announced that all votes accruing to ASI shares, a
total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being cumulatively voted for
the three ASI nominees and Charles Chamsay, and instructed the Secretary to so vote.
Luciano E. Salazar and other proxy holders announced that all the votes owned by and
or represented by them 467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617) were being
voted cumulatively in favor of Luciano E. Salazar. The Chairman, Baldwin Young,
nevertheless instructed the Secretary to cast all votes equally in favor of the three ASI
nominees, namely, Wolfgang Aurbach, John Griffin and David Whittingham and the six
originally nominated by Rogelio Vinluan, namely, Ernesto Lagdameo, Sr., Raul Boncan,
Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, and Baldwin Young. The
Secretary then certified for the election of the following Wolfgang Aurbach, John Griffin,
David Whittingham Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo,
George F. Lee, Raul A. Boncan, Baldwin Young. The representative of ASI then moved to
recess the meeting which was duly seconded. There was also a motion to adjourn (p. 28,
Rollo, AC-G.R. SP No. 05617). This motion to adjourn was accepted by the Chairman,
Baldwin Young, who announced that the motion was carried and declared the meeting
adjourned. Protests against the adjournment were registered and having been ignored,
Mr. Jaqua the ASI representative, stated that the meeting was not adjourned but only
recessed and that the meeting would be reconvened in the next room. The Chairman
then threatened to have the stockholders who did not agree to the decision of the
Chairman on the casting of votes bodily thrown out. The ASI Group, Luciano E. Salazar
and other stockholders, allegedly representing 53 or 54% of the shares of Saniwares,
decided to continue the meeting at the elevator lobby of the American Standard
Building. The continued meeting was presided by Luciano E. Salazar, while Andres
Gatmaitan acted as Secretary. On the basis of the cumulative votes cast earlier in the
meeting, the ASI Group nominated its four nominees; Wolfgang Aurbach, John Griffin,
David Whittingham and Charles Chamsay. Luciano E. Salazar voted for himself, thus the
said five directors were certified as elected directors by the Acting Secretary, Andres
Gatmaitan, with the explanation that there was a tie among the other six (6) nominees
for the four (4) remaining positions of directors and that the body decided not to break
the tie. (pp. 37-39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties with the Securities and
Exchange Commission (SEC). The first petition filed was for preliminary injunction by Saniwares, Emesto V.
Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George
F. Lee against Luciano Salazar and Charles Chamsay. The case was denominated as SEC Case No.
2417. The second petition was for quo warranto and application for receivership by Wolfgang Aurbach,
John Griffin, David Whittingham, Luciano E. Salazar and Charles Chamsay against the group of Young
and Lagdameo (petitioners in SEC Case No. 2417) and Avelino F. Cruz. The case was docketed as SEC
Case No. 2718. Both sets of parties except for Avelino Cruz claimed to be the legitimate directors of the
corporation.

The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision
upholding the election of the Lagdameo Group and dismissing the quo warranto petition of Salazar
and Chamsay. The ASI Group and Salazar appealed the decision to the SEC en banc which affirmed
the hearing officer's decision.

The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by
Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R. SP
No. 05604) and by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions were
consolidated and the appellate court in its decision ordered the remand of the case to the Securities
and Exchange Commission with the directive that a new stockholders' meeting of Saniwares be
ordered convoked as soon as possible, under the supervision of the Commission.

Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court (Court
of Appeals) rendered the questioned amended decision. Petitioners Wolfgang Aurbach, John Griffin,
David P. Whittingham and Charles Chamsay in G.R. No. 75875 assign the following errors:

I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF PRIVATE

RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF SANIWARES WHEN IN FACT
THERE WAS NO ELECTION AT ALL.

II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING THEIR FULL
VOTING RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN SANIWARES, THUS DEPRIVING
PETITIONERS AND THE CORPORATION THEY REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT
DUE PROCESS OF LAW.

III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS INTO THE
AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH ACTION IT CANNOT
LEGALLY DO. (p. 17, Rollo-75875)

Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the following
grounds:

11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual

agreements entered into by stockholders and the replacement of the conditions of such
agreements with terms never contemplated by the stockholders but merely dictated by
the CA .

11.2. The Amended decision would likewise sanction the deprivation of the property
rights of stockholders without due process of law in order that a favored group of
stockholders may be illegally benefitted and guaranteed a continuing monopoly of the
control of a corporation. (pp. 14-15, Rollo-75975-76)

On the other hand, the petitioners in G.R. No. 75951 contend that:

THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING THAT THE
STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO TWO BLOCKS, FAILS TO FULLY ENFORCE
THE BASIC INTENT OF THE AGREEMENT AND THE LAW.

II

THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE PETITIONERS
HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8 MARCH 1983 ANNUAL
STOCKHOLDERS MEETING OF SANTWARES. (P. 24, Rollo-75951)

The issues raised in the petitions are interrelated, hence, they are discussed jointly.
The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during its
annual stockholders' meeting held on March 8, 1983. To answer this question the following factors should
be determined: (1) the nature of the business established by the parties whether it was a joint venture or
a corporation and (2) whether or not the ASI Group may vote their additional 10% equity during
elections of Saniwares' board of directors.

The rule is that whether the parties to a particular contract have thereby established among themselves
a joint venture or some other relation depends upon their actual intention which is determined in
accordance with the rules governing the interpretation and construction of contracts. (Terminal Shares,
Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales Corp. v. California Press Mfg.
Co. 20 Cal. 2nd 751, 128 P 2nd 668)

The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the
parties should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly stated
that the parties' intention was to form a corporation and not a joint venture.

They specifically mention number 16 under Miscellaneous Provisions which states:

xxx xxx xxx

c) nothing herein contained shall be construed to constitute any of the parties hereto
partners or joint venturers in respect of any transaction hereunder. (At P. 66, Rollo-GR No.
75875)

They object to the admission of other evidence which tends to show that the parties' agreement was to
establish a joint venture presented by the Lagdameo and Young Group on the ground that it
contravenes the parol evidence rule under section 7, Rule 130 of the Revised Rules of Court. According
to them, the Lagdameo and Young Group never pleaded in their pleading that the "Agreement" failed
to express the true intent of the parties.

The parol evidence Rule under Rule 130 provides:

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.

Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and Answer to
Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true intent of the parties,
to wit:

xxx xxx xxx

4. While certain provisions of the Agreement would make it appear that the parties
thereto disclaim being partners or joint venturers such disclaimer is directed at third
parties and is not inconsistent with, and does not preclude, the existence of two distinct
groups of stockholders in Saniwares one of which (the Philippine Investors) shall constitute
the majority, and the other ASI shall constitute the minority stockholder. In any event, the
evident intention of the Philippine Investors and ASI in entering into the Agreement is to
enter into ajoint venture enterprise, and if some words in the Agreement appear to be
contrary to the evident intention of the parties, the latter shall prevail over the former
(Art. 1370, New Civil Code). The various stipulations of a contract shall be interpreted
together attributing to the doubtful ones that sense which may result from all of them
taken jointly (Art. 1374, New Civil Code). Moreover, in order to judge the intention of the
contracting parties, their contemporaneous and subsequent acts shall be principally
considered. (Art. 1371, New Civil Code). (Part I, Original Records, SEC Case No. 2417)

It has been ruled:

In an action at law, where there is evidence tending to prove that the parties joined their
efforts in furtherance of an enterprise for their joint profit, the question whether they
intended by their agreement to create a joint adventure, or to assume some other
 relation is a question of fact for the jury. (Binder v. Kessler v 200 App. Div. 40,192 N Y S 653;
Pyroa v. Brownfield (Tex. Civ. A.) 238 SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33
C.J. p. 871)

In the instant cases, our examination of important provisions of the Agreement as well as the testimonial
evidence presented by the Lagdameo and Young Group shows that the parties agreed to establish a
joint venture and not a corporation. The history of the organization of Saniwares and the unusual
arrangements which govern its policy making body are all consistent with a joint venture and not with
an ordinary corporation. As stated by the SEC:

According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the

Agreement with ASI in behalf of the Philippine nationals. He testified that ASI agreed to
accept the role of minority vis-a-vis the Philippine National group of investors, on the
condition that the Agreement should contain provisions to protect ASI as the minority.

An examination of the Agreement shows that certain provisions were included to protect
the interests of ASI as the minority. For example, the vote of 7 out of 9 directors is required
in certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement]. ASI is
contractually entitled to designate a member of the Executive Committee and the vote
of this member is required for certain transactions [Sec. 3 (b) (i)].

The Agreement also requires a 75% super-majority vote for the amendment of the articles
and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right to
designate the president and plant manager [Sec. 5 (6)]. The Agreement further provides
that the sales policy of Saniwares shall be that which is normally followed by ASI [Sec. 13
(a)] and that Saniwares should not export "Standard" products otherwise than through
ASI's Export Marketing Services [Sec. 13 (6)]. Under the Agreement, ASI agreed to provide
technology and know-how to Saniwares and the latter paid royalties for the same. (At p.
2).

xxx xxx xxx

It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes of
the board of directors for certain actions, in effect gave ASI (which designates 3 directors
under the Agreement) an effective veto power. Furthermore, the grant to ASI of the right
to designate certain officers of the corporation; the super-majority voting requirements
for amendments of the articles and by-laws; and most significantly to the issues of tms
case, the provision that ASI shall designate 3 out of the 9 directors and the other
stockholders shall designate the other 6, clearly indicate that there are two distinct
groups in Saniwares, namely ASI, which owns 40% of the capital stock and the Philippine
National stockholders who own the balance of 60%, and that 2) ASI is given certain
protections as the minority stockholder.

Premises considered, we believe that under the Agreement there are two groups of
stockholders who established a corporation with provisions for a special contractual
relationship between the parties, i.e., ASI and the other stockholders. (pp. 4-5)

Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the
selection of the nine directors on a six to three ratio. Each group is assured of a fixed number of directors
in the board.

Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young also
testified that Section 16(c) of the Agreement that "Nothing herein contained shall be construed to
constitute any of the parties hereto partners or joint venturers in respect of any transaction hereunder"
was merely to obviate the possibility of the enterprise being treated as partnership for tax purposes and
liabilities to third parties.

Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities
of a local firm are constrained to seek the technology and marketing assistance of huge multinational
corporations of the developed world. Arrangements are formalized where a foreign group becomes a
minority owner of a firm in exchange for its manufacturing expertise, use of its brand names, and other
such assistance. However, there is always a danger from such arrangements. The foreign group may,
from the start, intend to establish its own sole or monopolistic operations and merely uses the joint
venture arrangement to gain a foothold or test the Philippine waters, so to speak. Or the covetousness
may come later. As the Philippine firm enlarges its operations and becomes profitable, the foreign
group undermines the local majority ownership and actively tries to completely or predominantly take
over the entire company. This undermining of joint ventures is not consistent with fair dealing to say the
least. To the extent that such subversive actions can be lawfully prevented, the courts should extend
protection especially in industries where constitutional and legal requirements reserve controlling
ownership to Filipino citizens.

The Lagdameo Group stated in their appellees' brief in the Court of Appeal

In fact, the Philippine Corporation Code itself recognizes the right of stockholders to enter
into agreements regarding the exercise of their voting rights.

Sec. 100. Agreements by stockholders.-

xxx xxx xxx

2. An agreement between two or more stockholders, if in writing and signed by the

parties thereto, may provide that in exercising any voting rights, the shares held by them
shall be voted as therein provided, or as they may agree, or as determined in
accordance with a procedure agreed upon by them.

Appellants contend that the above provision is included in the Corporation Code's
chapter on close corporations and Saniwares cannot be a close corporation because it
has 95 stockholders. Firstly, although Saniwares had 95 stockholders at the time of the
disputed stockholders meeting, these 95 stockholders are not separate from each other
but are divisible into groups representing a single Identifiable interest. For example, ASI, its
nominees and lawyers count for 13 of the 95 stockholders. The YoungYutivo family count
for another 13 stockholders, the Chamsay family for 8 stockholders, the Santos family for 9
stockholders, the Dy family for 7 stockholders, etc. If the members of one family and/or
business or interest group are considered as one (which, it is respectfully submitted, they
should be for purposes of determining how closely held Saniwares is there were as of 8
March 1983, practically only 17 stockholders of Saniwares. (Please refer to discussion in
pp. 5 to 6 of appellees' Rejoinder Memorandum dated 11 December 1984 and Annex "A"
thereof).

Secondly, even assuming that Saniwares is technically not a close corporation because it
has more than 20 stockholders, the undeniable fact is that it is a close-held corporation.
Surely, appellants cannot honestly claim that Saniwares is a public issue or a widely held
corporation.

In the United States, many courts have taken a realistic approach to joint venture
corporations and have not rigidly applied principles of corporation law designed
primarily for public issue corporations. These courts have indicated that express
arrangements between corporate joint ventures should be construed with less emphasis
on the ordinary rules of law usually applied to corporate entities and with more
consideration given to the nature of the agreement between the joint venturers (Please
see Wabash Ry v. American Refrigerator Transit Co., 7 F 2d 335; Chicago, M & St. P. Ry v.
Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v. Atlantic Coast Line Ry;
240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A 2d 903; Hathway v. Porter
Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571; Beardsley v. Beardsley, 138 U.S. 262; "The
Legal Status of Joint Venture Corporations", 11 Vand Law Rev. p. 680,1958). These
American cases dealt with legal questions as to the extent to which the requirements
arising from the corporate form of joint venture corporations should control, and the
courts ruled that substantial justice lay with those litigants who relied on the joint venture
agreement rather than the litigants who relied on the orthodox principles of corporation
law.

As correctly held by the SEC Hearing Officer:

It is said that participants in a joint venture, in organizing the joint venture deviate from
the traditional pattern of corporation management. A noted authority has pointed out
that just as in close corporations, shareholders' agreements in joint venture corporations
often contain provisions which do one or more of the following: (1) require greater than
majority vote for shareholder and director action; (2) give certain shareholders or groups
of shareholders power to select a specified number of directors; (3) give to the
shareholders control over the selection and retention of employees; and (4) set up a
procedure for the settlement of disputes by arbitration (See I O' Neal, Close Corporations,
1971 ed., Section 1.06a, pp. 15-16) (Decision of SEC Hearing Officer, P. 16)

Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply that
agreements regarding the exercise of voting rights are allowed only in close
corporations. As Campos and Lopez-Campos explain:
 Paragraph 2 refers to pooling and voting agreements in particular. Does this provision
necessarily imply that these agreements can be valid only in close corporations as
defined by the Code? Suppose that a corporation has twenty five stockholders, and
therefore cannot qualify as a close corporation under section 96, can some of them
enter into an agreement to vote as a unit in the election of directors? It is submitted that
there is no reason for denying stockholders of corporations other than close ones the
right to enter into not voting or pooling agreements to protect their interests, as long as
they do not intend to commit any wrong, or fraud on the other stockholders not parties
to the agreement. Of course, voting or pooling agreements are perhaps more useful and
more often resorted to in close corporations. But they may also be found necessary even
in widely held corporations. Moreover, since the Code limits the legal meaning of close
corporations to those which comply with the requisites laid down by section 96, it is
entirely possible that a corporation which is in fact a close corporation will not come
within the definition. In such case, its stockholders should not be precluded from entering
into contracts like voting agreements if these are otherwise valid. (Campos & Lopez-
Campos, op cit, p. 405)

In short, even assuming that sec. 5(a) of the Agreement relating to the designation or
nomination of directors restricts the right of the Agreement's signatories to vote for
directors, such contractual provision, as correctly held by the SEC, is valid and binding
upon the signatories thereto, which include appellants. (Rollo No. 75951, pp. 90-94)

In regard to the question as to whether or not the ASI group may vote their additional equity during
elections of Saniwares' board of directors, the Court of Appeals correctly stated:

As in other joint venture companies, the extent of ASI's participation in the management
of the corporation is spelled out in the Agreement. Section 5(a) hereof says that three of
the nine directors shall be designated by ASI and the remaining six by the other
stockholders, i.e., the Filipino stockholders. This allocation of board seats is obviously in
consonance with the minority position of ASI.

Having entered into a well-defined contractual relationship, it is imperative that the

parties should honor and adhere to their respective rights and obligations thereunder.
Appellants seem to contend that any allocation of board seats, even in joint venture
corporations, are null and void to the extent that such may interfere with the
stockholder's rights to cumulative voting as provided in Section 24 of the Corporation
Code. This Court should not be prepared to hold that any agreement which curtails in
any way cumulative voting should be struck down, even if such agreement has been
freely entered into by experienced businessmen and do not prejudice those who are not
parties thereto. It may well be that it would be more cogent to hold, as the Securities and
Exchange Commission has held in the decision appealed from, that cumulative voting
rights may be voluntarily waived by stockholders who enter into special relationships with
each other to pursue and implement specific purposes, as in joint venture relationships
between foreign and local stockholders, so long as such agreements do not adversely
affect third parties.

In any event, it is believed that we are not here called upon to make a general rule on
this question. Rather, all that needs to be done is to give life and effect to the particular
contractual rights and obligations which the parties have assumed for themselves.

On the one hand, the clearly established minority position of ASI and the contractual
allocation of board seats Cannot be disregarded. On the other hand, the rights of the
stockholders to cumulative voting should also be protected.

In our decision sought to be reconsidered, we opted to uphold the second over the first.
Upon further reflection, we feel that the proper and just solution to give due
consideration to both factors suggests itself quite clearly. This Court should recognize and
uphold the division of the stockholders into two groups, and at the same time uphold the
right of the stockholders within each group to cumulative voting in the process of
determining who the group's nominees would be. In practical terms, as suggested by
appellant Luciano E. Salazar himself, this means that if the Filipino stockholders cannot
agree who their six nominees will be, a vote would have to be taken among the Filipino
stockholders only. During this voting, each Filipino stockholder can cumulate his votes.
ASI, however, should not be allowed to interfere in the voting within the Filipino group.
Otherwise, ASI would be able to designate more than the three directors it is allowed to
designate under the Agreement, and may even be able to get a majority of the board
seats, a result which is clearly contrary to the contractual intent of the parties.
 Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or circumvention
of the Anti-Dummy Law (Com. Act No. 108, as amended) and the nationalization
requirements of the Constitution and the laws if ASI is allowed to nominate more than
three directors. (Rollo-75875, pp. 38-39)

The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to vote
their additional equity pursuant to Section 24 of the Corporation Code which gives the stockholders of a
corporation the right to cumulate their votes in electing directors. Petitioner Salazar adds that this right if
granted to the ASI Group would not necessarily mean a violation of the Anti-Dummy Act
(Commonwealth Act 108, as amended). He cites section 2-a thereof which provides:

And provided finally that the election of aliens as members of the board of directors or
governing body of corporations or associations engaging in partially nationalized
activities shall be allowed in proportion to their allowable participation or share in the
capital of such entities. (amendments introduced by Presidential Decree 715, section 1,
promulgated May 28, 1975)

The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The point
of query, however, is whether or not that provision is applicable to a joint venture with clearly defined
agreements:

The legal concept of ajoint venture is of common law origin. It has no precise legal
definition but it has been generally understood to mean an organization formed for
some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly
distinguishable from the partnership, since their elements are similar community of interest
in the business, sharing of profits and losses, and a mutual right of control. Blackner v. Mc
Dermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P. 2d., 1043 [1939]; Buckley v.
Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d. 242 [1955]). The main distinction cited
by most opinions in common law jurisdictions is that the partnership contemplates a
general business with some degree of continuity, while the joint venture is formed for the
execution of a single transaction, and is thus of a temporary nature. (Tufts v. Mann 116
Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d. 74 [1947];
Gates v. Megargel 266 Fed. 811 [1920]). This observation is not entirely accurate in this
jurisdiction, since under the Civil Code, a partnership may be particular or universal, and
a particular partnership may have for its object a specific undertaking. (Art. 1783, Civil
Code). It would seem therefore that under Philippine law, a joint venture is a form of
partnership and should thus be governed by the law of partnerships. The Supreme Court
has however recognized a distinction between these two business forms, and has held
that although a corporation cannot enter into a partnership contract, it may however
engage in a joint venture with others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954])
(Campos and Lopez-Campos Comments, Notes and Selected Cases, Corporation Code
1981)

Moreover, the usual rules as regards the construction and operations of contracts generally apply to a
contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).

Bearing these principles in mind, the correct view would be that the resolution of the question of
whether or not the ASI Group may vote their additional equity lies in the agreement of the parties.

Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the
allocation of director seats under Section 5 (a) of the "Agreement," and the right of each group of
stockholders to cumulative voting in the process of determining who the group's nominees would be
under Section 3 (a) (1) of the "Agreement." As pointed out by SEC, Section 5 (a) of the Agreement
relates to the manner of nominating the members of the board of directors while Section 3 (a) (1)
relates to the manner of voting for these nominees.

This is the proper interpretation of the Agreement of the parties as regards the election of members of
the board of directors.

To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would
be beholden to them would obliterate their minority status as agreed upon by the parties. As aptly
stated by the appellate court:

... ASI, however, should not be allowed to interfere in the voting within the Filipino group.
Otherwise, ASI would be able to designate more than the three directors it is allowed to
designate under the Agreement, and may even be able to get a majority of the board
seats, a result which is clearly contrary to the contractual intent of the parties.
 Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or circumvention
of the Anti-Dummy Law (Com. Act No. 108, as amended) and the nationalization
requirements of the Constitution and the laws if ASI is allowed to nominate more than
three directors. (At p. 39, Rollo, 75875)

Equally important as the consideration of the contractual intent of the parties is the consideration as
regards the possible domination by the foreign investors of the enterprise in violation of the
nationalization requirements enshrined in the Constitution and circumvention of the Anti-Dummy Act. In
this regard, petitioner Salazar's position is that the Anti-Dummy Act allows the ASI group to elect board
directors in proportion to their share in the capital of the entity. It is to be noted, however, that the same
law also limits the election of aliens as members of the board of directors in proportion to their
allowance participation of said entity. In the instant case, the foreign Group ASI was limited to
designate three directors. This is the allowable participation of the ASI Group. Hence, in future dealings,
this limitation of six to three board seats should always be maintained as long as the joint venture
agreement exists considering that in limiting 3 board seats in the 9-man board of directors there are
provisions already agreed upon and embodied in the parties' Agreement to protect the interests arising
from the minority status of the foreign investors.

With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly affirmed
by the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto
V. Lagdameo, Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique Lagdameo, and
George F. Lee as the duly elected directors of Saniwares at the March 8,1983 annual stockholders'
meeting.

On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a
cumulative voting during the election of the board of directors of the enterprise as ruled by the
appellate court and submits that the six (6) directors allotted the Filipino stockholders should be selected
by consensus pursuant to section 5 (a) of the Agreement which uses the word "designate" meaning
"nominate, delegate or appoint."

They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino
stockholders are allowed to select their nominees separately and not as a common slot determined by
the majority of their group.

Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors
should not be interpreted in isolation. This should be construed in relation to section 3 (a) (1) of the
Agreement. As we stated earlier, section 3(a) (1) relates to the manner of voting for these nominees
which is cumulative voting while section 5(a) relates to the manner of nominating the members of the
board of directors. The petitioners in G.R. No. 75951 agreed to this procedure, hence, they cannot now
impugn its legality.

The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting
procedure cannot, however, be ignored. The validity of the cumulative voting procedure is dependent
on the directors thus elected being genuine members of the Filipino group, not voters whose interest is
to increase the ASI share in the management of Saniwares. The joint venture character of the enterprise
must always be taken into account, so long as the company exists under its original agreement.
Cumulative voting may not be used as a device to enable ASI to achieve stealthily or indirectly what
they cannot accomplish openly. There are substantial safeguards in the Agreement which are intended
to preserve the majority status of the Filipino investors as well as to maintain the minority status of the
foreign investors group as earlier discussed. They should be maintained.

WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the petition in
G.R. No. 75951 is partly GRANTED. The amended decision of the Court of Appeals is MODIFIED in that
Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo, Baldwin Young, Raul
A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are declared as the duly
elected directors of Saniwares at the March 8,1983 annual stockholders' meeting. In all other respects,
the questioned decision is AFFIRMED. Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No.
75875.

SO ORDERED.
 [CLASSIFICATION OF CORPORATIONS]

G.R. No. L-22619 December 2, 1924

NATIONAL COAL COMPANY, plaintiff-appellee,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellant.

This action was brought in the Court of First Instance of the City of Manila on the 17th day of July, 1923,
for the purpose of recovering the sum of P12,044.68, alleged to have been paid under protest by the
plaintiff company to the defendant, as specific tax on 24,089.3 tons of coal. Said company is a
corporation created by Act No. 2705 of the Philippine Legislature for the purpose of developing the
coal industry in the Philippine Islands and is actually engaged in coal mining on reserved lands
belonging to the Government. It claimed exemption from taxes under the provision of sections 14 and
15 of Act No. 2719, and prayed for a judgment ordering the defendant to refund to the plaintiff said
sum of P12,044.68, with legal interest from the date of the presentation of the complaint, and costs
against the defendant.

The defendant answered denying generally and specifically all the material allegations of the
complaint, except the legal existence and personality of the plaintiff. As a special defense, the
defendant alleged (a) that the sum of P12,044.68 was paid by the plaintiff without protests, and (b) that
said sum was due and owing from the plaintiff to the Government of the Philippine Islands under the
provisions of section 1496 of the Administrative Code and prayed that the complaint be dismissed, with
costs against the plaintiff.

Upon the issue thus presented, the case was brought on for trial. After a consideration of the evidence
adduced by both parties, the Honorable Pedro Conception, judge, held that the words "lands owned
by any person, etc.," in section 15 of Act No. 2719 should be understood to mean "lands held in lease or
usufruct," in harmony with the other provision of said Act; that the coal lands possessed by the plaintiff,
belonging to the Government, fell within the provisions of section 15 of Act No. 2719; and that a tax of
P0.04 per ton of 1,016 kilos on each ton of coal extracted therefrom, as provided in said section, was the
only tax which should be collected from the plaintiff; and sentenced the defendant to refund to the
plaintiff the sum of P11,081.11 which is the difference between the amount collected under section
1496 of the Administrative Code and the amount which should have been collected under the
provisions of said section 15 of Act No. 2719. From that sentence the defendant appealed, and now
makes the following assignments of error:

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

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

The question confronting us in this appeal is whether the plaintiff is subject to the taxes under section 15
of Act No. 2719, or to the specific taxes under section 1496 of the Administrative Code.

The plaintiff corporation was created on the 10th day of March, 1917, by Act No. 2705, for the purpose
of developing the coal industry in the Philippine Island, in harmony with the general plan of the
Government to encourage the development of the natural resources of the country, and to provided
facilities therefor. By said Act, the company was granted the general powers of a corporation "and such
other powers as may be necessary to enable it to prosecute the business of developing coal deposits in
the Philippine Island and of mining, extracting, transporting and selling the coal contained in said
deposits." (Sec. 2, Act No. 2705.) By the same law (Act No. 2705) the Government of the Philippine
Islands is made the majority stockholder, evidently in order to insure proper government supervision and
control, and thus to place the Government in a position to render all possible encouragement,
assistance and help in the prosecution and furtherance of the company's business.

On May 14, 1917, two months after the passage of Act No. 2705, creating the National Coal Company,
the Philippine Legislature passed Act No. 2719 "to provide for the leasing and development of coal
lands in the Philippine Islands." On October 18, 1917, upon petition of the National Coal Company, the
Governor-General, by Proclamation No. 39, withdrew "from settlement, entry, sale or other disposition, all
coal-bearing public lands within the Province of Zamboanga, Department of Mindanao and Sulu, and
the Island of Polillo, Province of Tayabas." Almost immediately after the issuance of said proclamation
the National Coal Company took possession of the coal lands within the said reservation, with an area
of about 400 hectares, without any further formality, contract or lease. Of the 30,000 shares of stock
issued by the company, the Government of the Philippine Islands is the owner of 29,809 shares, that is, of
99 1/3 per centum of the whole capital stock.

If we understand the theory of the plaintiff-appellee, it is, that it claims to be the owner of the land from
which it has mined the coal in question and is therefore subject to the provisions of section 15 of Act No.
2719 and not to the provisions of the section 1496 of the Administrative Code. That contention of the
plaintiff leads us to an examination of the evidence upon the question of the ownership of the land
from which the coal in question was mined. Was the plaintiff the owner of the land from which the coal
in question was mined? If the evidence shows the affirmative, then the judgment should be affirmed. If
the evidence shows that the land does not belong to the plaintiff, then the judgment should be
reversed, unless the plaintiff's rights fall under section 3 of said Act.

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

Said proclamation (Exhibit B) was issued by Francis Burton Harrison, then Governor-General, on the 18th
day of October, 1917, and provided: "Pursuant to the provision of section 71 of Act No. 926, I hereby
withdraw from settlement, entry, sale, or other disposition, all coal-bearing public lands within the
Province of Zamboanga, Department of Mindanao and Sulu, and the Island of Polillo, Province of
Tayabas." It will be noted that said proclamation only provided that all coal-bearing public lands within
said province and island should be withdrawn from settlement, entry, sale, or other disposition. There is
nothing in said proclamation which authorizes the plaintiff or any other person to enter upon said
reversations and to mine coal, and no provision of law has been called to our attention, by virtue of
which the plaintiff was entitled to enter upon any of the lands so reserved by said proclamation without
first obtaining permission therefor.

The plaintiff is a private corporation. The mere fact that the Government happens to the majority
stockholder does not make it a public corporation. Act No. 2705, as amended by Act No. 2822, makes it
subject to all of the provisions of the Corporation Law, in so far as they are not inconsistent with said Act
(No. 2705). No provisions of Act No. 2705 are found to be inconsistent with the provisions of the
Corporation Law. As a private corporation, it has no greater rights, powers or privileges than any other
corporation which might be organized for the same purpose under the Corporation Law, and certainly
it was not the intention of the Legislature to give it a preference or right or privilege over other legitimate
private corporations in the mining of coal. While it is true that said proclamation No. 39 withdrew "from
settlement, entry, sale, or other disposition of coal-bearing public lands within the Province of
Zamboanga . . . and the Island of Polillo," it made no provision for the occupation and operation by the
plaintiff, to the exclusion of other persons or corporations who might, under proper permission, enter
upon the operate coal mines.

On the 14th day of May, 1917, and before the issuance of said proclamation, the Legislature of the
Philippine Island in "an Act for the leasing and development of coal lands in the Philippine Islands" (Act
No. 2719), made liberal provision. Section 1 of said Act provides: "Coal-bearing lands of the public
domain in the Philippine Island shall not be disposed of in any manner except as provided in this Act,"
thereby giving a clear indication that no "coal-bearing lands of the public domain" had been disposed
of by virtue of said proclamation.

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

The following propositions are fully sustained by the facts and the law:

(1) The National Coal Company is an ordinary private corporation organized under Act No. 2705,
and has no greater powers nor privileges than the ordinary private corporation, except those
mentioned, perhaps, in section 10 of Act No. 2719, and they do not change the situation here.

(2) It mined on public lands between the month of July, 1920, and the months of March, 1922,
24,089.3 tons of coal.

(3) Upon demand of the Collector of Internal Revenue it paid a tax of P0.50 a ton, as taxes under
the provisions of article 1946 of the Administrative Code on the 15th day of December, 1922.

(4) It is admitted that it is neither the owner nor the lessee of the lands upon which said coal was
mined.

(5) The proclamation of Francis Burton Harrison, Governor-General, of the 18th day of October,
1917, by authority of section 1 of Act No. 926, withdrawing from settlement, entry, sale, or other
dispositon all coal-bearing public lands within the Province of Zamboanga and the Island of Polillo, was
not a reservation for the benefit of the National Coal Company, but for any person or corporation of the
Philippine Islands or of the United States.

(6) That the National Coal Company entered upon said land and mined said coal, so far as the
record shows, without any lease or other authority from either the Secretary of Agriculture and Natural
Resources or any person having the power to grant a leave or authority.

From all of the foregoing facts we find that the issue is well defined between the plaintiff and the
defendant. The plaintiff contends that it was liable only to pay the internal revenue and other fees and
taxes provided for under section 15 of Act No. 2719; while the defendant contends, under the facts of
record, the plaintiff is obliged to pay the internal revenue duty provided for in section 1496 of the
Administrative Code. That being the issue, an examination of the provisions of Act No. 2719 becomes
necessary.

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

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

Third. The internal revenue duty and tax which must be paid upon coal-bearing lands owned by any
person, firm, association or corporation.

To repeat, it will be noted, first, that Act No. 2719 provides an internal revenue duty and tax upon
unreserved, unappropriated coal-bearing public lands which may be leased by the Secretary of
Agriculture and Natural Resources; and, second, that said Act (No. 2719) provides an internal revenue
duty and tax imposed upon any person, firm, association or corporation, who may be the owner of
"coal-bearing lands." A reading of said Act clearly shows that the tax imposed thereby is imposed upon
two classes of persons only — lessees and owners.

The lower court had some trouble in determining what was the correct interpretation of section 15 of
said Act, by reason of what he believed to be some difference in the interpretation of the language
used in Spanish and English. While there is some ground for confusion in the use of the language in
Spanish and English, we are persuaded, considering all the provisions of said Act, that said section 15
has reference only to persons, firms, associations or corporations which had already, prior to the
existence of said Act, become the owners of coal lands. Section 15 cannot certainty refer to "holders or
lessees of coal lands' for the reason that practically all of the other provisions of said Act has reference
to lessees or holders. If section 15 means that the persons, firms, associations, or corporation mentioned
therein are holders or lessees of coal lands only, it is difficult to understand why the internal revenue duty
and tax in said section was made different from the obligations mentioned in section 3 of said Act,
imposed upon lessees or holders.

From all of the foregoing, it seems to be made plain that the plaintiff is neither a lessee nor an owner of
coal-bearing lands, and is, therefore, not subject to any other provisions of Act No. 2719. But, is the
plaintiff subject to the provisions of section 1496 of the Administrative Code?

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

Therefore, the judgment appealed from is hereby revoked, and the defendant is hereby relieved from
all responsibility under the complaint. And, without any finding as to costs, it is so ordered.
G.R. No. 95237-38 September 13, 1991

DAVAO CITY WATER DISTRICT, CAGAYAN DE ORO CITY WATER DISTRICT, METRO CEBU WATER DISTRICT,
ZAMBOANGA CITY WATER DISTRICT, LEYTE METRO WATER DISTRICT, BUTUAN CITY WATER DISTRICT,
CAMARINES NORTE WATER DISTRICT, LAGUNA WATER DISTRICT, DUMAGUETE CITY WATER DISTRICT, LA
UNION WATER DISTRICT, BAYBAY WATER DISTRICT, METRO LINGAYEN WATER DISTRICT, URDANETA WATER
DISTRICT, COTABATO CITY WATER DISTRICT, MARAWI WATER DISTRICT, TAGUM WATER DISTRICT, DIGOS
WATER DISTRICT, BISLIG WATER DISTRICT, and MECAUAYAN WATER DISTRICT,petitioners,
vs.
CIVIL SERVICE COMMISSION, and COMMISSION ON AUDIT, respondents.

Whether or not the Local Water Districts formed and created pursuant to the provisions of Presidential
Decree No. 198, as amended, are government-owned or controlled corporations with original charter
falling under the Civil Service Law and/or covered by the visitorial power of the Commission on Audit is
the issue which the petitioners entreat this Court, en banc, to shed light on.

Petitioners are among the more than five hundred (500) water districts existing throughout the country
formed pursuant to the provisions of Presidential Decree No. 198, as amended by Presidential Decrees
Nos. 768 and 1479, otherwise known as the "Provincial Water Utilities Act of 1973."

Presidential Decree No. 198 was issued by the then President Ferdinand E. Marcos by virtue of his
legislative power under Proclamation No. 1081. It authorized the different local legislative bodies to form
and create their respective water districts through a resolution they will pass subject to the guidelines,
rules and regulations therein laid down. The decree further created and formed the "Local Water Utilities
Administration" (LWUA), a national agency attached to the National Economic and Development
Authority (NEDA), and granted with regulatory power necessary to optimize public service from water
utilities operations.

The respondents, on the other hand, are the Civil Service Commission (CSC) and the Commission on
Audit (COA), both government agencies and represented in this case by the Solicitor General.

On April 17, 1989, this Court ruled in the case of Tanjay Water District v. Gabaton, et al. (G.R. No. 63742,
172 SCRA 253):

Significantly, Article IX (B), Section 2(1) of the 1987 Constitution provides that the Civil Service embraces
all branches, subdivisions, instrumentalities, and agencies of the government, including government-
owned and controlled corporations with original charters. Inasmuch as PD No. 198, as amended, is the
original charter of the petitioner, Tanjay Water District, and respondent Tarlac Water District and all
water districts in the country, they come under the coverage of the Civil Service Law, rules and
regulations. (Sec. 35, Art. VIII and Sec. 37, Art. IX of PD No. 807).

As an offshoot of the immediately cited ruling, the CSC. issued Resolution No. 90-575, the dispositive
portion of which reads:

NOW THEREFORE, in view of all the foregoing, the Commission resolved, as it hereby resolves to rule that
Local Water Districts, being quasi-public corporations created by law to perform public services and
supply public wants, the matter of hiring and firing of its officers and employees should be governed by
the Civil Service Law, rules and regulations. Henceforth, all appointments of personnel of the different
local water districts in the country shall be submitted to the Commission for appropriate action. (Rollo. p.
22).

However, on May 16, 1990, in G.R. No. 85760, entitled "Metro Iloilo Water District v. National Labor
Relations Commission, et al.," the Third Division of this Court ruled in a minute resolution:

xxx xxx xxx

Considering that PD 198 is a general legislation empowering and/or authorizing government agencies
and entities to create water districts, said PD 198 cannot be considered as the charter itself creating the
Water District. Public respondent NLRC did not commit any grave abuse of discretion in holding that the
operative act, that created the Metro Iloilo Water District was the resolution of the Sangguniang
Panglunsod of Iloilo City. Hence, the employees of Water Districts are not covered by Civil Service Laws
as the latter do (sic) not have original charters.

In adherence to the just cited ruling, the CSC suspended the implementation of Resolution No. 90-575
by issuing Resolution No. 90-770 which reads:

xxx xxx xxx

NOW, THEREFORE, in view of all the foregoing, the Commission resolved to rule, as it hereby rules, that
the implementation of CSC. Resolution No. 575 dated June 27, 1990 be deferred in the meantime
pending clarification from the Supreme Court are regards its conflicting decisions in the cases of Tanjay
Water District v. Gabaton and Metro Iloilo Water District v. National Labor Relations Commission. (p.
26, Rollo)

In the meanwhile, there exists a divergence of opinions between COA on one hand, and the (LWUA),
on the other hand, with respect to the authority of COA to audit the different water districts.

COA opined that the audit of the water districts is simply an act of discharging the visitorial power
vested in them by law (letter of COA to LWUA dated August 13, 1985, pp. 29-30, Rollo).

On the other hand, LWUA maintained that only those water districts with subsidies from the government
fall within the COA's jurisdiction and only to the extent of the amount of such subsidies, pursuant to the
provision of the Government Auditing Code of the Phils.

It is to be observed that just like the question of whether the employees of the water districts falls under
the coverage of the Civil Service Law, the conflict between the water districts and the COA is also
dependent on the final determination of whether or not water districts are government-owned or
controlled corporations with original charter. The reason behind this is Sec. 2(1), Article IX-D of the 1987
constitution which reads:

Sec. 2(1) The Commission on Audit shall have the power, authority, and duty to examine, audit, and
settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and
property, owned or held in trust by, or pertaining to the Government, or any of its subdivisions, agencies
or instrumentalities, including government-owned or controlled corporations with original charters, and
on a post audit basis. (emphasis supplied)

Petitioners' main argument is that they are private corporations without original charter, hence they are
outside the jurisdiction of respondents CSC and COA. Reliance is made on the Metro Iloilo case which
declared petitioners as quasi-public corporations created by virtue of PD 198, a general legislation
which cannot be considered as the charter itself creating the water districts. Holding on to this ruling,
petitioners contend that they are private corporations which are only regarded as quasi-public or semi-
public because they serve public interest and convenience and that since PD 198 is a general
legislation, the operative act which created a water district is not the said decree but the resolution of
the sanggunian concerned.

After a fair consideration of the parties' arguments coupled with a careful study of the applicable laws
as well as the constitutional provisions involved, We rule against the petitioners and reiterate Our ruling in
Tanjay case declaring water districts government-owned or controlled corporations with original
charter.

As early as Baguio Water District v. Trajano, et al., (G.R. No. 65428, February 20, 1984, 127 SCRA 730), We
already ruled that a water district is a corporation created pursuant to a special law — P.D. No. 198, as
amended, and as such its officers and employees are covered by the Civil Service Law.

In another case (Hagonoy Water District v. NLRC, G.R. No. 81490, August 31, 1988, 165 SCRA 272), We
ruled once again that local water districts are quasi-public corporations whose employees belong to
the Civil Service. The Court's pronoucement in this case, as extensively quoted in
the Tanjay case, supra, partly reads:

"The only question here is whether or not local water districts are governmkent owned or controlled
corporations whose employees are subject to the provisions of the Civil Service Law. The Labor Arbiter
asserted jurisdiction over the alleged illegal dismissal of private respondent Villanueva by relying on
Section 25 of Presidential decree No. 198, known as the Provincial Water Utilities Act of 1973" which went
onto effect in 25 May 1973, and which provides as follows:

Exemption from Civil Service. — The district and its employees, being engaged in a proprietary function,
are hereby exempt from the provisions of the Civil Service Law. Collective Bargaining shall be available
only to personnel below supervisory levels: Provided, however, That the total of all salaries, wages
emoluments, benefits or other compensation paid to all employees in any month shall not exceed fifty
percent (50%) of average net monthy revenue. Said net revenue representing income from water sales
and sewerage service charges, less pro-rata share of debt service and expenses for fuel or energy for
pumping during the preceding fiscal year.

The Labor Arbiter failed to take into accout the provisions of Presidential Decree No. 1479, which went
into effect on 11 June 1978, P.D. No. 1479, wiped away Section 25 of PD 198 quoted above, and
Section 26 of PD 198 was renumbered as Section 25 in the following manner:

Section 26 of the same decree PD 198 is hereby amended to read as Section 25 as follows:
Section 25. Authorization. — The district may exercise all the powers which are expressly granted by this
Title or which are necessarily implied from or incidental to the powers and purposes herein stated. For
the purpose of carrying out the objectives of this Act, a district is hereby granted the power of eminent
domain, the exercise thereof shall, however, be subject to review by the Administration.

Thus, Section 25 of PD 198 exempting the employees of water districts from the application of the Civil
Service Law was removed from the statute books:

xxx xxx xxx

We grant the petition for the following reasons:

1. Section 25 of PD No. 198 was repealed by Section 3 of PD No. 1479; Section 26 of PD No. 198 was
amended ro read as Sec. 25 by Sec. 4 of PD No. 1479. The amendatory decree took effect on June 11,
1978.

xxx xxx xxx

3. The BWD is a corporation created pursuant to a special law — PD No. 198, as amended. As such its
officers and employees are part of the Civil Service (Sec. 1, Art. XII-B, [1973] Constitution; PD No. 868).

Ascertained from a consideration of the whole statute, PD 198 is a special law applicable only to the
different water districts created pursuant thereto. In all its essential terms, it is obvious that it pertains to a
special purpose which is intended to meet a particular set of conditions and cirmcumstances. The fact
that said decree generally applies to all water districts throughout the country does not change the
fact that PD 198 is a special law. Accordingly, this Court's resolution in Metro Iloilo case declaring PD 198
as a general legislation is hereby abandoned.

By "government-owned or controlled corporation with original charter," We mean government owned

or controlled corporation created by a special law and not under the Corporation Code of the
Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No. 82819, February 8, 1989, 170 SCRA 79, 82), We
held:

The Court, in National Service Corporation (NASECO) v. National Labor Relations Commission, G.R. No
69870, promulgated on 29 November 1988, quoting extensively from the deliberations of 1986
Constitutional Commission in respect of the intent and meaning of the new phrase "with original
character," in effect held that government-owned and controlled corporations with original charter
refer to corporations chartered by special law as distinguished from corporations organized under our
general incorporation statute — the Corporations Code. In NASECO, the company involved had been
organized under the general incorporation statute and was a sbusidiary of the National Investment
Development Corporation (NIDC) which in turn was a subsidiary of the Philippine National Bank, a bank
chartered by a special statute. Thus, government-owned or controlled corporations like NASECO are
effectively, excluded from the scope of the Civil Service. (emphasis supplied)

From the foregoing pronouncement, it is clear that what has been excluded from the coverage of the
CSC are those corporations created pursuant to the Corporation Code. Significantly, petitioners are not
created under the said code, but on the contrary, they were created pursuant to a special law and are
governed primarily by its provision.

No consideration may thus be given to petitioners' contention that the operative act which created the
water districts are the resolutions of the respective local sanggunians and that consequently, PD 198, as
amended, cannot be considered as their charter.

It is to be noted that PD 198, as amended is the source of authorization and power to form and
maintain a district. Section 6 of said decree provides:

Sec. 6. Formation of District. — This Act is the source of authorization and power to form and maintain a
district. Once formed, a district is subject to the provisions of this Act and not under the jurisdiction of
any political subdivision, . . . .

Moreover, it must be observed that PD 198, contains all the essential terms necessary to constitute a
charter creating a juridical person. For example, Section 6(a) provides for the name that will be used by
a water district, thus:

Sec. 6. . . . To form a district, the legislative body of any city, municipality or province shall enact a
resolution containing the following:

a) The name of the local water district, which shall include the name of the city, municipality, or
province, or region thereof, served by said system, followed by the words "Water District."
It also prescribes for the numbers and qualifications of the members of the Board of Directors:

Sec. 8. Number and Qualification. — The Board of Directors of a district shall be composed of five
citizens of the Philippines who are of voting age and residents within the district. One member shall be a
representative of civic-oriented service clubs, one member of representative of professional
associations, one member a representative of business, commercial or financial organizations, one
member a representative of educational institutions and one member a representative of women's
organization. No public official shall serve as director. Provided, however, that if the district has availed
of the financial assistance of the Administration, the Administration may appoint any of its personnel to
sit in the board of directors with all the rights and privileges appertaining to a regular member for such
period as the indebtedness remains unpaid in which case the board shall be composed of six members;
(as amended by PDs Nos. 768 and 1479).

the manner of their appointment and nominations;

Sec. 9. Appointment. — Board members shall be appointed by the appointing authority. Said
appointments shall be made from a list of nominees, if any, submitted pursuant to Section 10. If no
nominations are submitted, the appointing authority shall appoint any qualified person of the category
to the vacant position;

Sec.10. Nominations. — On or before October 1 of each even numbered year, the secretary of the
district shall contact each known organization, association, or institution being represented by the
director whose term will expire on December 31 and solicit nominations from these organizations to fill
the position for the ensuing term. One nomination may be submitted in writing by each such
organization to the Secretary of the district on or before November 1 of such year: This list of nominees
shall be transmitted by the Secretary of the district to the office of the appointing authority on or before
November 15 of such year and he shall make his appointment from the list submitted on or before
December 15. In the event the appointing authority fails to make his appointments on or before
December 15, selection shall be made from said list of nominees by majority vote of the seated
directors of the district constituting a quorum. Initial nominations for all five seats of the board shall be
solicited by the legislative body or bodies at the time of adoption of the resolution forming the district.
Thirty days thereafter, a list of nominees shall be submitted to the provincial governor in the event the
resolution forming the district is by a provincial board, or the mayor of the city or municipality in the
event the resolution forming the adoption of the district is by the city or municipal board of councilors,
who shall select the initial directors therefrom within 15 days after receipt of such nominations;

their terms of office:

Sec. 11. Term of Office. — Of the five initial directors of each newly formed district, two shall be
appointed for a maximum term of two years, two for a maximum term of four years, and one for a
maximum term of six years. Terms of office of all directors in a given district shall be such that the term of
at least one director, but not more then two, shall expire on December 31 of each even-numbered
year. Regular terms of office after the initial terms shall be for six years commencing on January 1 of
odd-numbered years. Directors may be removed for cause only, subject to review and approval of the
Administration; (as amended by PD 768).

the manner of filling up vacancies:

Sec. 12. Vacancies. — In the event of a vacancy in the board of directors occurring more than six
months before expiration of any director's term, the remaining directors shall within 30 days, serve notice
to or request the secretary of the district for nominations and within 30 days, thereafter a list of nominees
shall be submitted to the appointing authority for his appointment of a replacement director from the
list of nominees. In the absence of such nominations, the appointing authority shall make such
appointment. If within 30 days after submission to him of a list of nominees the appointing authority fails
to make an appointment, the vacancy shall be filled from such list by a majority vote of the remaining
members of the Board of Directors constituting a quorum. Vacancies occurring within the last six months
of an unexpired term shall also be filled by the Board in the above manner. The director thus appointed
shall serve the unexpired term only; (as amended by PD 768).

and the compensation and personal liability of the members of the Board of Directors:

Sec. 13. Compensation. — Each director shall receive a per diem, to be determined by the board, for
each meeting of the board actually attended by him, but no director shag receive per diems in any
given month in excess of the equivalent of the total per diems of four meetings in any given month. No
director shall receive other compensation for services to the district.

Any per diem in excess of P50.00 shall be subject to approval of the Administration (as amended by PD
768).
Sec. 14. Personal Liability. — No director may be held to be personally liable for any action of the
district.

Noteworthy, the above quoted provisions of PD 198, as amended, are similar to those which are
actually contained in other corporate charters. The conclusion is inescapable that the said decree is in
truth and in fact the charter of the different water districts for it clearly defines the latter's primary
purpose and its basic organizational set-up. In other words, PD 198, as amended, is the very law which
gives a water district juridical personality. While it is true that a resolution of a local sanggunian is still
necessary for the final creation of a district, this Court is of the opinion that said resolution cannot be
considered as its charter, the same being intended only to implement the provisions of said decree. In
passing a resolution forming a water district, the local sanggunian is entrusted with no authority or
discretion to grant a charter for the creation of a private corporation. It is merely given the authority for
the formation of a water district, on a local option basis, to be exercised under and in pursuance of PD
198.

More than the aforequoted provisions, what is of important interest in the case at bar is Section 3, par.
(b) of the same decree which reads:

Sec. 3(b). Appointing authority. — The person empowered to appoint the members of the Board of
Directors of a local water district, depending upon the geographic coverage and population make-up
of the particular district. In the event that more than seventy-five percent of the total active water
service connections of a local water districts are within the boundary of any city or municipality, the
appointing authority shall be the mayor of that city or municipality, as the case may be; otherwise, the
appointing authority shall be the governor of the province within which the district is located: Provided,
That if the existing waterworks system in the city or municipality established as a water district under this
Decree is operated and managed by the province, initial appointment shall be extended by the
governor of the province. Subsequent appointments shall be as specified herein.

If portions of more than one province are included within the boundary of the district, and the
appointing authority is to be the governors then the power to appoint shall rotate between the
governors involved with the initial appointments made by the governor in whose province the greatest
number of service connections exists (as amended by PD 768).

The above-quoted section definitely sets to naught petitioners' contention that they are private
corporations. It is clear therefrom that the power to appoint the members who will comprise the Board
of Directors belongs to the local executives of the local subdivision units where such districts are
located. In contrast, the members of the Board of Directors or trustees of a private corporation are
elected from among the members and stockholders thereof. It would not be amiss to emphasize at this
point that a private corporation is created for the private purpose, benefit, aim and end of its members
or stockholders. Necessarily, said members or stockholders should be given a free hand to choose those
who will compose the governing body of their corporation. But this is not the case here and this clearly
indicates that petitioners are definitely not private corporations.

The foregoing disquisition notwithstanding, We are, however, not unaware of the serious repercussion
this may bring to the thousands of water districts' employees throughout the country who stand to be
affected because they do not have the necessary civil service eligibilities. As these employees are
equally protected by the constitutional guarantee to security of tenure, We find it necessary to rule for
the protection of such right which cannot be impaired by a subsequent ruling of this Court. Thus, those
employees who have already acquired their permanent employment status at the time of the
promulgation of this decision cannot be removed by the mere reason that they lack the necessary civil
service eligibilities.

ACCORDINGLY, the petition is hereby DISMISSED. Petitioners are declared "government-owned or

controlled corporations with original charter" which fall under the jurisdiction of the public respondents
CSC and COA.

SO ORDERED.
 [EXPLOITATION OF NATURAL RESOURCES]

G.R. No. L-6776 May 21, 1955

THE REGISTER OF DEEDS OF RIZAL, petitioner-appellee,

vs.
UNG SIU SI TEMPLE, respondent-appellant.

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 48-D, 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.

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 17-18).

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:

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.
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.

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.

The resolution appealed from is affirmed, with costs against appellant.